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Guide to

First-time
Adoption of
Ind AS

| Guide to First-time Adoption of Ind AS

Contents
Overview of Ind AS roadmap

06

Key differences between Ind AS and Indian GAAP

10

First-time adoption of Ind AS

42

Ind AS conversion challenges and perspectives

84

Appendix: Sample Ind AS reconciliation note for first Ind AS

98

financial statements

Guide to First-time Adoption of Ind AS |

| Guide to First-time Adoption of Ind AS

Preface
The transition from Indian GAAP to Ind AS is a historic and
a landmark change. In accordance with its commitment
to G20, India is converging to IFRS in a phased manner
starting from annual periods beginning on or after 1 April
2016. The IFRS converged standards will be known as
Indian Accounting Standards (Ind-AS) and will contain
numerous carve outs from IFRS. The change to Ind AS is
a hugely positive move that will bring the accounting in
India substantially closer to the accounting followed by
the global companies under IFRS.
Due to carve outs, Indian companies may not be able to
make a dual statement of compliance with both Ind AS
and IASB IFRS. Therefore, Indian companies may not be
able to use Ind AS financial statements for global listing
purposes that require compliance with IFRS. However,
Indian companies may find it easier to prepare IFRS
financial statements from Ind AS financial statements
rather than Indian GAAP financial statements.
The application of Ind AS is more than a mere accounting
or technical exercise. The consequences are far wider
than financial reporting issues, and extend to various
significant business and regulatory matters including debt
covenants, dividend, managerial remuneration, ESOP,
minimum alternate tax (MAT), training of employees, IT
systems, internal control and taxation. A case in point is
infrastructure companies. They may have to pay higher
MAT, if MAT is based on Ind AS profits, because under
Ind AS, construction revenue and profits are recognized
upfront in a service concession arrangement. As a CBDT
committee is still examining these issues, companies
must engage with these agencies to put their concerns
at the forefront. It is imperative that companies identify
and address these and many other issues in their Ind AS
conversion project.
Ind AS conversion will not be a hassle-free job. At the
same time, with appropriate planning and an early start,
it may not be a hugely painful exercise. Experience tells
us that major European companies took about eighteen
months to two years to convert from national GAAP to
IFRS. Our recommendation to entities in phase 1 and 2,
that have not started the process of Ind AS conversion
is to start immediately. More importantly, there are no
disadvantages to getting a start on the process, but the
advantages include:

Securing the right people, whether by engaging a


third party to provide assistance or by hiring them
directly
Putting fewer burdens on valuable accounting,
financial reporting and IT resources as the conversion
date nears
More time to train employees on Ind AS and to
make them comfortable with the standards and
interpretations, and
Discussing the financial reporting effects of
conversion to Ind AS with investors and analysts to
provide them with some sense of the changes in
financial statements due to the new framework.

This publication will provide entities a head start on


Ind AS and answer questions such as the following:

What are the major differences between Ind AS and


Indian GAAP?
How to convert Indian GAAP balance sheet to Ind AS
balance sheet on first time adoption?
How will Ind AS impact the financial statements of
entities and what would be the conversion efforts?
What challenges, other than converting the financial
statements, should entities prepare themselves for?
What approach or strategy should be followed in
transiting to Ind AS?

The next few years will be exciting, but challenging at the


same time. We are committed to help you migrate to Ind
AS as smoothly as possible, and look forward to teaming
with you on this landmark journey.
We will be happy to receive your feedback and answer any
questions that you may have.
Best wishes,
Ernst & Young LLP

Guide to First-time Adoption of Ind AS |

Overview of
Ind AS roadmap

On 16 February 2015, the Ministry of Corporate Affairs


(MCA) notified the Companies (Indian Accounting Standards)
Rules, 2015 laying down the roadmap for application of IFRS
converged standards (Ind AS) to Indian companies other than
banking companies, insurance companies and non-banking
finance companies (NBFCs). The Government has also notified
Ind AS standards (known as -Indian Accounting Standards) for
application by these companies.

Mandatory Phase 1: Application of Ind AS is mandatory


from the financial year beginning on or after 1 April 2016,
for the following companies:

Listed or non-listed companies with net worth of


INR500 crores (INR5 billion) or more

Holding, subsidiaries, joint ventures or associates


companies of these companies

Mandatory Phase 2: Application of Ind AS is mandatory


from the financial year beginning on or after 1 April 2017,
for the following companies:

Voluntary Phase: Early adoption of Ind AS is permitted


from financial year beginning on or after 1 April 2015.

All listed companies not covered under the mandatory


phase 1

| Guide to First-time Adoption of Ind AS

Non-listed companies with net worth of INR250


crores (INR2.5 billion) or more and not covered in the
mandatory phase 1
Holding, subsidiaries, joint ventures or associates of
these companies

All companies applying Ind AS are required to present


comparative information according to Ind AS for one year.
This requires companies to start applying Ind AS from the
beginning of the previous period. For example, a company
covered under mandatory phase 1 needs to apply Ind AS
for financial year beginning on or after 1 April 2016. In
addition, it also needs to give Ind AS comparatives for the
year ended 31 March 2016. Consequently, its needs to
start applying Ind AS from 1 April 2015.
Ind AS will apply to both standalone financial statements
(SFS) and consolidated financial statements (CFS) of
companies covered under the roadmap.
Companies not covered under the roadmap can either
apply Ind AS voluntarily or continue applying existing
standards, i.e., accounting standards notified under
the Companies (Accounting Standards) Rules 2006 (as
amended) (hereinafter referred to as current Indian
GAAP).

Any company opting to apply Ind AS will need to prepare


its financial statements according to Ind AS consistently.
Once Ind AS are applied voluntarily, this option will be
irrevocable and such companies will not be required to
prepare another set of financial statements in accordance
with current Indian GAAP.
Net worth for a company is to be calculated in accordance
with its SFS as on 31 March 2014 or the first audited
financial statements for accounting period which ends
after that date. Accordingly, if a company has net worth
more than INR500 crores (INR5 billion) as of
31 March 2015, then it will be covered in the Phase 1
itself and apply Ind AS from financial year beginning on or
after 1 April 2016.

Insurance companies, banking companies and NBFCs will


not be required to apply Ind AS for preparation of their
financial statements either voluntarily or mandatorily.

The adoption of Ind AS in accordance with the roadmap will


bring accounting in India closer to the world at large that
has adopted/converged with IFRS. India has gone for the
Convergence approach instead of full adoption of IFRS as issued
by the International Accounting Standards Board (IASB). Ind
AS contains certain changes vis--vis IASB IFRS. Consequently,
financial statements prepared in accordance with Ind AS may
not be fully compliant with IASB IFRS.

Given below are salient features of Ind AS roadmap notified by the MCA:
2016-17

2015-16
April

March

April

March

Mandatory
Phase 1
Opening Balance Sheet
1 April 2015

Financial statements
for year ended
31 March 2017

Comparative for 31
March 2016

2017-18

2016-17
April

March

April

March

Mandatory
Phase 2
Opening Balance Sheet
1 April 2016

Comparative for 31
March 2017

Financial statements
for year ended
31 March 2018

Guide to First-time Adoption of Ind AS |

Practical issues and


perspective
Given below is an overview of practical issues that are expected
to arise on the applicability of the Ind AS roadmap and our
perspectives on these issues. It is expected that the Ministry
of Corporate Affairs (MCA) or the Institute of Chartered
Accountants of India (ICAI) may provide guidance on these
issues.
1. Ind AS roadmap prescribes applicability based on financial
years beginning on or after 1 April. Given below is the
first Ind AS applicability date under various phases for
companies not having a 31 March year-end:
Year-end

Voluntary
Phase

Mandatory
Phase 1

Mandatory
Phase 2

Ind AS are applicable for financial years


beginning
31
December

1 January
2016

1 January
2017

1 January
2018

30 June

1 July 2015

1 July 2016

1 July 2017

30
September

1 October
2015

1 October
2016

1 October
2017

Companies are also required to present comparative


information according to Ind AS for one year.
2. The Companies Act, 2013 (the Act) requires that all
companies, except those exempted by the Tribunal, should
have 31 March year-end. A company needs to consider
this aspect carefully alongwith Ind AS applicability dates to
decide the financial year from which it is allowed/required
to start applying Ind AS. Consider that XYZ Limited has
net worth exceeding INR500 crores (INR5 billion). It has
historically used calendar year (i.e., 12 month period
ending 31 December) as its financial year. To comply with
the Acts requirements concerning uniform financial year,
it is preparing financial statements for the 15-month
period from 1 January 2015 to 31 March 2016. Since Ind
AS applicability is decided based on the beginning of the
financial year and not the end, XYZ cannot apply Ind AS
in its financial statements for the year ended 31 March
2016, either mandatorily or voluntarily. However, since
XYZ has net worth exceeding INR500 crores (INR5 billion),
it will start applying Ind AS from financial year beginning
1 April 2016. The first Ind AS financial statements of XYZ
will have comparative information for 15-month periods,

| Guide to First-time Adoption of Ind AS

i.e., from 1 January 2015 to 31 March 2016. Its date of


transition to Ind AS will be 1 January 2015.
3. The roadmap requires companies to apply either Ind AS
or existing accounting standards in entirety. Companies
are not allowed to adopt standards by mix and match or
slicing and dicing. However, current Indian GAAP does not
prescribe specific accounting for various transactions,
other events or conditions. For example, current Indian
GAAP does not contain comprehensive accounting for
service concession arrangements. We believe that a
company applying current Indian GAAP can refer to Ind AS
for accounting of service concession arrangements, to the
extent that Ind AS accounting does not contradict with the
principles under Indian GAAP.
4. In accordance with the roadmap, Ind AS also applies
to holding, subsidiary, joint venture and associates of
companies meeting Ind AS applicability criteria. The
roadmap does not define these terms. It merely states
that words and expressions used herein and not defined
in these rules but defined in the Companies Act shall have
the same meaning respectively assigned to them in the
Companies Act. Our view is that definitions according to
Ind AS should be used due to the following key reasons:
a) Ind AS are contained in the Annexure to the
Companies (Indian Accounting Standards) Rules,
2015. Hence, they are part of the rules/roadmap. The
roadmap requires definitions according to the Act to
be applied only if they are not defined in the roadmap
itself.
b) The Act has defined the term mainly from regulatory
purposes. For accounting purposes, definitions
according to applicable accounting standards are
applied.
c) The roadmap requires holding, subsidiaries, joint
ventures and associates of companies meeting Ind
AS applicability criteria to adopt Ind AS from the
same date to facilitate the preparation of CFS. The
application of this view ensures that this objective is
met in its true spirit.

5. The roadmap requires that, to decide Ind AS applicability,


net worth should be computed according to section 2(57)
of the Act. The section defines the term as below:
Net worth means the aggregate value of the paid-up
share capital and all reserves created out of the profits
and securities premium account, after deducting the
aggregate value of the accumulated losses, deferred
expenditure and miscellaneous expenditure not written
off, as per the audited balance sheet, but does not include
reserves created out of revaluation of assets, write-back of
depreciation and amalgamation.
However, the roadmap is silent as to whether net worth
to determine Ind AS applicability will be calculated in
accordance with Indian GAAP or Ind AS. From practical
perspective, a company will first decide the applicability and
then start applying Ind AS. Hence, we believe that the net
worth calculated in accordance with Indian GAAP should
be used to determine the applicability of Ind AS. This view
is also supported by the fact that a company needs to first
assess Ind AS applicability as on 31 March 2014. Companies
are not allowed to prepare Ind AS financial statements for
the year ended 31 March 2014.
6. In accordance with the roadmap, insurance companies,
banking companies and NBFCs are not required to apply
Ind AS for preparation of their financial statements either
voluntarily or mandatorily. We believe that companies
in the financial services sector are not required to apply
Ind AS for their own statutory reporting even if they
are holding, subsidiary, joint venture or associates of
companies in the non-financial services sector meeting
Ind AS applicability criteria. For example, an NBFC is a
subsidiary of the company covered in mandatory phase
1 of Ind AS adoption. The NBFC is not required to adopt
Ind AS alongwith its non-financial sector parent company.
Nor can the NBFC adopt Ind AS voluntarily for its statutory
reporting at this stage. Similar principle applies even
to banking and insurance companies. This is because
the Reserve Bank of India (RBI) and the Insurance and
Regulatory Development Authority (IRDA) have prescribed
various accounting guidelines for banking companies,
NBFCs and insurance companies, which are not in sync
with Ind AS. Until RBI and IRDA do not adopt Ind AS and
modify/withdraw their existing guidelines to align with Ind
AS, banking and insurance companies and NBFCs cannot
apply Ind AS for their own statutory reporting.

Ind AS 110 Consolidated Financial Statements is clear


that a parent will prepare CFS using uniform accounting
policies for like transactions and other events in similar
circumstances. Moreover, it is a settled principle that all
accounting policies used in the preparation of CFS should
be compliant with the accounting standards under which
CFS are prepared. As stated above, many aspects of RBI
guidelines on accounting are not Ind AS compliant. Hence,
the parent cannot use Indian GAAP financial statements of
the NBFC for preparing its CFS. Rather, the NBFC will need
to prepare Ind AS group reporting package to facilitate
preparation of Ind AS CFS by the parent.
7. In accordance with Ind AS roadmap, the first Ind AS
financial statements of a company should contain
comparative figures for at least one year. Moreover, Ind
AS 101 requires companies to prepare an Ind AS opening
balance sheet at the transition date.
To obtain appropriate audit evidence regarding account
balances and disclosures in the Ind AS financial statements
for the current period, the auditor will also need to obtain
sufficient appropriate audit evidence about the opening
Ind AS balance sheet and Ind AS adjustments for the
comparative period. As a result, audit procedures, which
an auditor performs in relation to the comparative financial
information, are likely to be more extensive than the
work generally performed on comparative information.
The auditor will also perform audit procedures on Ind AS
reconciliations from the previous GAAP to Ind AS.

Guide to First-time Adoption of Ind AS |

Key differences between


Ind AS and Indian GAAP

Revenue recognition
Key differences
Under Indian GAAP, revenue recognition is dealt with under
AS 9 Revenue Recognition and AS 7 Construction Contracts.
Ind AS 115 Revenue from Contracts with Customers is a
single standard which deals with revenue recognition in a
comprehensive manner under the Ind AS regime.
The application of Ind AS 115 will change the requirements
for recognizing revenue for most companies, particularly
for companies in the real estate and construction industry.
IFRS 15 Revenue from Contracts with Customers is effective
for IFRS reporting entities for the first interim period within
annual reporting periods beginning on or after 1 January
2017, and will allow early adoption. Unlike IFRS, Ind AS
requires immediate application of Ind AS 115 and does not
provide a choice between IAS 18 Revenue/IAS 11 Construction
Contracts and IFRS 15. This eliminates the need to convert
twice, i.e., applying IAS 18/IAS 11 on first time adoption and
later changing to IFRS 15 from 1 April 2017. Therefore, India
will probably be the first country to apply IFRS 15, without any
precedence or experience of its application in other countries.
This may not be the best outcome, considering that IFRS 15
requires application of a significant amount of judgment, and
there are many open interpretative issues that IASB and FASB
have to resolve. Pending unresolved issues, IASB has recently
proposed to defer the application of IFRS 15 for IFRS reporting

10 | Guide to First-time Adoption of Ind AS

entities by one year i.e., reporting periods beginning on or after


1 January 2018. Till the finalization of this publication, the
ICAI has not issued any such proposal under Ind AS for public
comment.
Ind AS 115 sets-out principles that an entity applies to report
useful information about the amount, timing, and uncertainty
of revenue and cash flows arising from its contracts to provide
goods or services to customers. The core principle requires
an entity to recognize revenue to depict the transfer of goods
or services to customers in an amount that reflects the
consideration that it expects to be entitled to in exchange for
those goods or services.
Ind AS 115 applies to all contracts with customers, except
for contracts that are within the scope of other standards,
such as leases, insurance, and financial instruments. It is a
comprehensive standard that deals with revenue recognition.
Ind AS 115 establishes the following five-step model that will
apply to revenue earned from a contract with a customer
(with limited exceptions), regardless of the type of revenue
transaction or the industry.
1. Identify the contract(s) with a customer
Contracts may be written, verbal or implied by customary
business practices, but must be enforceable and have
commercial substance. The model applies to each contract
with a customer once it is probable the entity will collect
the consideration to which it will be entitled.

2. Identify the performance obligations in the contract


A performance obligation is a promise (or a group of
promises) that is distinct, as defined in the revenue
standard. In certain cases, identifying performance
obligations can be relatively straightforward, such as an
electronics stores promise to provide a television. In many
other cases, it can be more complex, such as a contract to
provide a new computer system with a three-year software
license, a right to upgrades, and technical support. Entities
must determine whether to account for performance
obligations separately, or as a group.
3. Determine the transaction price
The transaction price is the amount of consideration
an entity expects to be entitled to from a customer in
exchange for providing goods or services. Several factors
should be considered to determine the transaction price,
including whether there is variable consideration, a
significant financing component, non-cash consideration,
or amounts payable to the customer.
4. Allocate the transaction price to the performance
obligations in the contract
The transaction price is allocated to separate performance
obligations in the contract based on relative standalone
selling prices. Determining the relative standalone selling
price can be challenging when goods or services are not
sold on a standalone basis. Ind AS 115 sets out several
methods that can be used to estimate a standalone selling
price when one is not directly observable. Allocating
discounts and variable consideration must also be
considered.
5. Recognize revenue when (or as) the entity satisfies a
performance obligation
Revenue is recognized when (or as) the performance
obligations are satisfied. An entity satisfies a performance
obligation by transferring control of a promised good or
service to the customer, which could occur over time or at
a point in time. A performance obligation is satisfied at a
point in time unless it meets one of the following criteria, in
which case, it is satisfied over time:

The customer simultaneously receives and consumes


benefits provided by the entitys performance as the
entity performs.
The entitys performance creates or enhances an asset
that the customer controls as the asset is created or
enhanced.
The entitys performance does not create an asset
with an alternative use to the entity and the entity
has an enforceable right to payment for performance
completed to date.

Revenue is recognized in line with the pattern of transfer.


Revenue that is allocated to performance obligations
satisfied at a point in time will be recognized when control
of the good or service underlying the performance
obligation has been transferred. If the performance
obligation is satisfied over time, the revenue allocated to
that performance obligation will be recognized over the
period the performance obligation is satisfied, using a
single method that best depicts the pattern of the transfer
of control over time. Additional application guidance is
provided to assist entities when determining whether a
license of intellectual property transfers to a customer over
time or at a point in time.
Revenue is recognized when a customer obtains control
of a good or service, i.e., when it has the ability to direct
the use of and obtain the benefits from the good or
service. This is different from the concept of transfer of
risks and rewards espoused in AS 9. It is also different
from the current concept of recognizing revenue as the
earnings process is completed. Companies will also need to
determine if there is a continuous transfer of control and
consequently whether revenue should be recognized over
time or at a point in time.
Application guidance is provided in Ind AS 115 to assist
entities in applying its requirements to common arrangements,
including: licenses; warranties; rights of return; principal-versusagent considerations; options for additional goods or services
and breakage.

Guide to First-time Adoption of Ind AS |

11

Contract costs and other application guidance

Multiple element arrangements

In addition to the five-step model, Ind AS 115 specifies how to


account for the incremental costs of obtaining a contract and
the costs directly related to fulfilling a contract. Provided those
costs are expected to be recovered, they can be capitalized and
subsequently amortized and tested for impairment.

According to AS 9, revenue is measured by the charge made


to customers for goods supplied and services rendered and by
the charges and rewards arising from the use of resources by
them. Under Indian GAAP, an Expert Advisory Committee (EAC)
opinion deals with accounting for multiple element contracts
in a limited manner. In the absence of specific guidance, it
sometimes becomes difficult to determine revenue for a
contract that contains multiple elements such as sale of goods
and rendering of services. In contrast, Ind AS 115 prescribes
that the transaction price in such arrangements must be
allocated to each separate performance obligation, so that
revenue is recorded at the right time and for the right amount.

Time value of money


Some contracts with the customer may contain significant
financing element, either explicitly or implicitly. When the
financing element is significant, an entity should adjust the
transaction price for the time value of money. Ind AS 115
provides certain exceptions to applying this guidance and a
practical expedient, which allows entities to ignore time value
of money if the time between transfer of goods or services and
payment is less than one year.

Disclosures
Extensive disclosures are required to provide increased insight
into both revenue that has been recognized, and revenue that is
expected to be recognized in the future from existing contracts.
Quantitative and qualitative information will be provided about
the significant judgments and changes in those judgments that
management made to determine revenue that is recorded.

Key impact

Control model
Ind AS 115 has introduced the control model to determine
the point of revenue recognition. Management needs to
determine, at contract inception, whether control of a good
or service transfers to a customer over time or at a point in
time. Arrangements where the performance obligations are
satisfied over time are not limited to services arrangements.
Complex assets or certain customized goods constructed for a
customer, such as a complex refinery or specialized machinery,
could also be transferred over time, depending on the facts and
circumstances. Revenue is recognized over time if prescribed
criteria are met. This model may have significant impact on
companies engaged in construction or real estate business.

Key challenges in applying five-step model


The application of five-step models in Ind AS 115 gives rise to
various practical challenges. The following diagram provides an
overview of key challenges that are expected to arise.

Contracts

Performance obligations

Transaction price

Allocation

Recognition timing

Identifying all terms


of the contract

Identifying goods and


services

Base transaction price

Determining stand-alone
selling prices

Transfer of control: point


in time or over time

Combining contracts

Identifying performance
obligations

Signicant nancing
component

Repurchase provisions

Contract modications

Service-type warranties

Non-cash consideration

Allocating attributable
variable consideration
Allocating attributable
discount

Established business
practices

Options granting a
material right

Payments to customers

Consignment arrangements

Identifying the customer


(e.g.,principal vs. agent)

Changes in transaction
price

Customer acceptance

Determining legal
enforceability

Constraint

Licences

Bill-and-hold transactions

Measuring progress and


transferring control
12 | Guide to First-time Adoption of Ind AS

Financial instruments

Key differences

Ind AS 32 establishes detailed principles for presenting financial


instruments as liabilities or equity. One key feature, which requires
a financial instrument to be classified as a liability, is the existence
of a contractual obligation of one party (the issuer) to deliver
cash or another financial assets to another party (the holder), or
to exchange financial assets or liabilities under conditions that
are potentially unfavorable. In contrast, in the case of an equity
instrument, the issuer has no obligation to deliver cash or another
financial asset to the holder of the instrument. The application of
these principles requires certain instruments that have the form
of equity to be classified as liability. For example, under Ind AS
32, mandatorily redeemable preference shares on which a fixed
dividend is payable are treated as a liability.Under Indian GAAP,
notified accounting standards do not prescribe distinction between
equity and liabilities. Essentially, classification and accounting for
liability and equity is dictated by the legal form of the instrument.

Ind AS 32 requires compound financial instruments, such as


convertible bonds, to be split into liability and equity components,
and each component is recognized separately. The current Indian
GAAP does not entail split accounting, and financial instruments are
classified as either a liability or equity, depending on their primary
nature. For example, under current Indian GAAP, a convertible
debenture is generally treated as liability in entirety.

Ind AS 109 Financial Instruments, Ind AS 32 Financial


Instruments: Presentation, Ind AS 107 Financial Instruments:
Disclosures and Ind AS 113 Fair Value Measurement1 deal
with presentation, recognition, measurement and disclosure
aspects of financial and equity instruments in a comprehensive
manner. Pronouncements that deal with certain types of
financial instruments under Indian GAAP are AS 11 The Effects
of Changes in Foreign Exchange Rates, AS 13 Accounting for
Investments and the ICAI Announcement on Accounting for
Derivatives.
Recently, the ICAI has issued the Guidance Note on Accounting
for Derivative Contracts. This Guidance Note applies to all
entities that do not apply Ind AS. The Guidance Note deals
with recognition, measurement, presentation and disclosure
for derivative contracts. The Guidance Note also deals with
accounting for derivatives where the hedged item is covered
under notified Accounting Standards, e.g., a commodity, an
investment, etc. The Guidance Note, however, does not cover
accounting for foreign exchange forward contracts, which are
within the scope of AS 11. This Guidance Note is applicable for
financial year beginning on or after 1 April 2016. Its earlier
application is permitted.

Derivatives

Debt (including hybrid contracts)

Equity

Contractual cash ow characteristics test


(at instrument level)

Fail

Pass

Fail

Business model assessment


(at an aggregate level)
1

Hold-to-collect
contractual
cash ows

BM with objective
3
that results in
collecting contractual
cash ows and selling FA

Conditional fair value


option (FVO) elected?

Held for trading?


Yes

Neither
(1) nor (2)

No

Yes

Amortised
cost

FVTOCI
(with recycling)

No

FVTOCI option
elected ?

Yes

No

No

Fail

FVTPL

FVTOCI
(no recycling)

1 IFRS 113 Fair Value Measurement consolidates fair value measurement guidance from across various IFRS into a single standard. It does not change when fair value
can or should be used.
Guide to First-time Adoption of Ind AS |

13

Under Ind AS 109, all financial assets are classified among


three principal categories, namely, measured at amortized
cost, fair value through other comprehensive income
(FVTOCI) and fair value through profit or loss (FVTPL).
Amortized cost measurement is applicable only for debt
instruments. An entity may be able to use FVTPL and
FVTOCI categories both for debt and equity instruments.
The following diagram explains the classification
requirements.
A financial asset is subsequently measured at amortized
cost only if (i) the asset is held within a business model
whose objective is to collect contractual cash flows, and
(ii) the contractual terms of the financial asset give rise to
cash flows that are solely the payments of principal and
interest (SPPI). A financial asset is subsequently measured
at FVTOCI if it (i) meets the SPPI criterion, and (ii) is held
in a business model whose objective is achieved by both
collecting contractual cash flows and selling financial
assets. All other financial assets are classified as being
subsequently measured at FVTPL. For equity investments
that are not held for trading, an entity may irrevocably
elect at initial recognition to present subsequent changes in
the fair value in OCI.
Under Indian GAAP, loans and receivables are typically
measured at cost, less provision for doubtful debts. Interest
income on loans is recognized on time-proportion basis at
rates mentioned in the loan agreement. AS 13 requires an

investment to be classified either as long-term or current


investment. After initial recognition, long-term investments
are measured at cost, less other than temporary diminution
in the value of investment. Interest, if any, is recognized on
time proportion basis. Current investments are measured
at lower of cost or market price.

Under Ind AS 109, all financial liabilities are classified


either as at FVTPL or amortized cost. Financial liabilities
are classified as at FVTPL when they meet the definition
of held-for-trading, or when they are designated as such
on initial recognition. An entity may designate a financial
liability as at FVTPL only if it meets prescribed criteria at
its initial recognition. Initial measurement of all financial
liabilities is at fair value. Subsequent to initial recognition,
FVTPL liabilities are measured at fair values, with gain
or loss normally being recognized in profit or loss. For
non-derivative financial liabilities that are designated for
measurement as at FVTPL, the element of gain or loss
attributable to changes in credit risk should normally be
recognized in equity and the remainder is recognized in
profit or loss. All other financial liabilities are measured at
amortized cost using the effective interest rate method.
Ind AS 109 requires an entity to decide classification of
financial liabilities on initial recognition. No subsequent
reclassification of financial liabilities is allowed.
The diagram given below explains the classification
requirements:

Classification of financial liabilities


Held-for-trading

Yes

No
FVO used as per
criteria prescribed?

Yes

Other fair value


changes

No
Incudes embedded
derivatives

Changes due to
own credit

Yes

No

14 | Guide to First-time Adoption of Ind AS

Prot or loss

Separate embedded derivatives

Host Debt

Amortized cost

OCI

Embedded
derivatives

Fair value through prot or loss

Under Indian GAAP, accounting standards do not provide


detailed guidance on measurement of financial liabilities.
The common practice is to recognize a financial liability at
the consideration received on its recognition. Subsequently,
interest is recognized at a contractual rate, if any.

b) A separate instrument with the same terms as the


embedded derivative will meet the definition of a
derivative, and

Ind AS 109 defines a derivative as a financial instrument or


other contract with the following three characteristics:

c) The hybrid (combined) instrument is not measured at


fair value with changes in fair value recognized in the
statement of profit and loss (i.e., a derivative that is
embedded in a financial liability at fair value through
profit or loss is not separated).

Its value changes in response to the change in a


specified interest rate, financial instrument price, etc.

It requires zero or smaller initial net investment.

It is settled at a future date.

According to Ind AS 109, all derivatives are measured at


fair value and any gains/losses, except gains/losses on
derivatives used for hedge purposes, are recognized in
profit or loss.
Under Indian GAAP, AS 11 deals with foreign currency
forward exchange contracts (except for those entered into,
to hedge a firm commitment or highly probable forecast
transaction). Accounting prescribed under AS 11 for such
forward contracts is based on whether the contract is for
hedge or speculation purposes. For derivatives not covered
under AS 11, the ICAI Announcement on Accounting for
Derivatives requires a mark-to-market loss to be provided
for open derivative contracts as on the balance sheet date.
Mark-to-market gains generally remain outside the balance
sheet. Alternatively, the company may apply principles of
AS 30 Financial Instruments: Recognition and Measurement
to derivatives whose accounting is not covered under AS
11. According to AS 30, all derivatives are measured at
fair value, and any gains/losses, except gains/losses on
derivatives used for hedge purposes, are recognized in
profit or loss.
As stated above, the ICAI has recently issued the Guidance
Note on Accounting for Derivative Contracts, which is
applicable from financial years beginning on or after 1
April 2016. The Guidance Note requires that all derivatives
are measured at fair value, and any gains/losses, except
gains/losses on derivatives used for hedge purposes, are
recognized in profit or loss.

a) The economic characteristics and risks of the


embedded derivative are not closely related to the
economic characteristics and risks of the host contract,

Ind AS 109 does not permit embedded derivatives to


be separated from host contracts that are financial
assets. Rather, an entity applies Ind AS 109 classification
requirements to the entire hybrid contract. In case of all
other contracts, Ind AS 109 requires that an embedded
derivative should be separated from the host contract and
accounted for as a derivative if, and only if:

Under Indian GAAP, notified accounting standards do


not contain specific guidance on embedded derivatives.
Typically, entities do not identify embedded derivatives
separately.

Ind AS 109 deals with various aspects of hedge accounting


in a comprehensive manner. It defines three types of
hedging relationships, namely, fair value hedges, cash
flow hedges and hedges of net investments in a foreign
operation. It also lays down prerequisite conditions to apply
hedge accounting.
Under Indian GAAP, AS 11 deals with forward exchange
contracts for hedging foreign currency exposures (except
for those arising from firm commitments or highly probable
forecast transactions). There is no mandatory accounting
standard for other types of hedge. However, the Guidance
Note on Accounting for Derivative Contracts applicable from
financial years beginning on or after 1 April 2016 contains
detailed principles for hedge accounting, which are similar
to Ind AS 109.

Ind AS 109 introduces a new expected credit loss (ECL)


model for impairment of financial assets. The new model
applies to financial assets that are not measured as at
FVTPL, including loans, leases and trade receivables, debt
securities, contract assets under Ind AS 115 and specified
financial guarantees and loan commitments issued. The
new model does not apply to equity instruments, since they
are carried at FVTPL or FVTOCI. The model uses a dual
measurement approach, under which the loss allowance
is measured as either 12 month expected credit losses
(ECL) or lifetime expected credit losses (lifetime ECL). To
determine the application of 12-month ECL vs. lifetime
ECL, an entity must determine whether there has been a
significant increase in credit risk since the initial recognition
of an asset. If credit risk has not increased significantly,
12-month ECL is used to provide for impairment loss.
However, if credit risk has increased significantly, lifetime
ECL is used.
Guide to First-time Adoption of Ind AS |

15

if the net present value of the cash flows under the new
terms (including any fees paid net of any fees received)
discounted at the original EIR is at least 10% different
from the discounted present value of the remaining cash
flows of the original debt instrument. In addition, there
may be a situation where the modification of the debt is so
fundamental that immediate derecognition is appropriate
whether or not the 10% test is satisfied.

Under the current Indian GAAP, there is no detailed


guidance on methodology for determining the impairment
of financial assets, such as loan and receivables.

Ind AS 109 deals with derecognition of financial assets in


a comprehensive manner. Ind AS 109 derecognition rules
for financial assets are extremely complex. The decision
whether a transfer qualifies for derecognition is made by
applying a combination of risk and rewards and control
tests. The use of two models often create confusion,
however, those have been addressed by ensuring that
the risk and rewards test is applied first, with the control
test used only when the entity has neither transferred
substantially all risks and rewards of the asset nor retained
them. Derecognition cannot be achieved by only a legal
transfer. The transfer has to happen in substance, which
is evaluated by using a risk and rewards and a control
model. A legal opinion from a qualified attorney is normally
required to conclude on highly complex issues.

Under the current Indian GAAP, there is no detailed


guidance on determining derecognition of financial
liabilities.

Under Indian GAAP, notified accounting standards do not


deal with derecognition of financial assets/liabilities in a
comprehensive manner. There is no accounting standard
dealing with consolidation of special purpose entities
(SPEs). Consequently, differing practices are prevalent with
regard to derecognition of financial assets and liabilities.
It is understood that under Indian GAAP, many entities
may derecognize financial assets transferred under the
arrangements, such as, bill discounting and/or factoring
of trade receivables, from their Indian GAAP financial
statements. This is despite the fact that the transferor may
have provided credit enhancements to the transferee.

Ind AS 109 provides detailed guidance on derecognition


of a financial liability. An entity derecognizes a financial
liability or a part of it from the balance sheet when, and
only when, it is extinguished. A liability is extinguished
when the obligation specified in the contract is discharged,
cancelled or expires. Ind AS 109 requires an exchange
between an existing borrower and lender of debt
instruments with substantially different terms to be
accounted for as an extinguishment of the original financial
liability and the recognition of a new financial liability.
Similarly, a substantial modification of the terms of an
existing financial liability, or a part of it, (whether or not
due to the financial difficulty of the debtor) should be
accounted for as an extinguishment of the original financial
liability and the recognition of a new financial liability.
In accordance with Ind AS 109, the terms of exchanged
or modified debt are regarded as substantially different

16 | Guide to First-time Adoption of Ind AS

Ind AS 107 requires entities to provide comprehensive


disclosures in their financial statements to enable users to
evaluate:
The significance of financial instruments for its
financial position and performance, and
The nature and extent of risks arising from financial
instruments, and how the entity manages those risks.

The disclosures required under Ind AS 107 include


quantitative and qualitative information.
Under Indian GAAP, ICAI has issued an Announcement on
Disclosure regarding Derivative Instruments, which requires
certain minimum disclosures to be made concerning
financial instruments. However, the Guidance Note on
Accounting for Derivative Contracts applicable from
financial years beginning on or after 1 April 2016 requires
more comprehensive disclosures with regard to derivative
instruments and hedge accounting.

Ind AS 113 defines fair value, provides principles-based


guidance on how to measure fair value and requires
information about those fair value measurements to be
disclosed. It provides a framework to reduce inconsistency
and increase comparability in fair value measurements
used in financial reporting. It does not address the question
of which assets or liabilities are to be measured at fair
value or when those measurements must be performed.
An entity must look to other standards in that regard. The
standard applies to all fair value measurements, when
fair value is required or permitted by Ind AS, with limited
exceptions.
The current Indian GAAP does not contain detailed
guidance on methodology for fair value measurements.

Key impact
Liability v. equity classification
Due to application of Ind AS 109, liability and equity
classifications of financial instruments may change substantially.
Some of the instruments, such as redeemable preference shares,
are classified as equity under the current Indian GAAP. Under Ind
AS, these may be identified as liabilities, either wholly or partly.
Similarly, on adoption of Ind AS, compound instruments will need
to be split between debt and equity component. Each portion is
then treated separately.
The accounting classification of an instrument as a liability or
equity is much more than an accounting matter or matter of
presentation in financial statements. Particularly, it may have
significant impact on reported financial performance of an
entity. For instance, if an instrument needs to be classified as
liability instead of equity, any return payable thereon will be
charged to profit or loss as expense, instead of distribution
of profit. Moreover, such change in classification will impact
key performance indicators such as debt-equity ratio, interest
coverage ratio, debt service ratio and earnings per share. This
in turn, is likely to impact decision making of stakeholders such
as financial institutions, investors, vendors, customers and tax
authorities. It could also result in non-compliance with debt
covenants, and could affect other amounts such as the number
or stock options to be granted or managerial remuneration to
be paid.
It is not necessary that Ind AS 32 will only have a negative
impact. Depending on the situation of each company and the
nature of instruments issued, the impact could either be positive
or negative. For example, certain reputed companies have issued
perpetual bonds to raise long-term financing. As the name
suggests, these bonds do not have any fixed maturity. These
bonds, therefore, give a comfort of equity to the issuer. At the
same time, the issuer, at its discretion, may redeem these bonds
at a later date. Based on the exact legal and contractual terms of
perpetual bonds, it may be possible to conclude that these bonds
are not liability for the issuer; rather, they are part of equity
under Ind AS. If so, the issuer will treat interest payable on these
bonds as the distribution of profit and debit the same directly to
equity. However, if the issuer is or may be required to pay cash
on these bonds, e.g., because the holder has a right to put these
bonds to the issuer, these will be treated as liability and interest
payable thereon will be treated as charge to profit or loss.

Recognition and measurement


Ind AS 109 requires balance sheet recognition for all financial
instruments (including derivatives). It makes increased use of fair

values than Indian GAAP. All financial assets and liabilities are
initially recognized in the balance sheet at fair value. In the case
of FVTPL assets, liabilities and derivatives (other than those used
for hedging) and subsequent changes in fair value are recognized
in profit or loss. The use of fair values is likely to cause volatility
in the statement of profit and loss or other comprehensive
income (OCI). To comply with Ind AS 109 requirement for fair
value measurements, entities will have to make use of valuation
methods and valuation professionals.

Impairment
Ind AS 109 requires a provision for impairment to be recognized
based on the ECL model . To determine impairment loss,
companies will need to consider information that is reasonably
available at the reporting date about past events, current
conditions and forecasts of future economic conditions. The
need to incorporate forward-looking information means that
application of Ind AS 109 will require considerable judgment as
to how changes in macroeconomic factors will affect ECL.
Moreover, the focus on expected losses is likely to result in
increased volatility in the amounts charged to profit or loss,
especially for financial institutions (once Ind AS becomes
applicable to them and from the group reporting perspective),
while the increased level of judgment required in making the
calculation may mean that it will be more difficult to compare the
reported results of different entities. However, the more detailed
disclosure requirements should provide greater transparency
over an entitys credit risk and provisioning processes.

Derecognition
Due to the application of Ind AS 109 derecognition requirements,
an entity may not be able to derecognize financial assets
transferred under the arrangements, such as, bill discounting
and/or factoring of trade receivables, in entirety, if it has provided
credit enhancement to the transferor. Rather, based on the
specific facts, the entity will evaluate whether it should treat
the transfer as a financing transaction (i.e., debt) or continuing
involvement approach will apply which requires the entity to
continue recognizing the transferred asset to the extent of its
continuing involvement.

Comprehensive disclosures
Ind AS 107 requires very comprehensive disclosures regarding
financial instruments and risks to which an entity is exposed,
as well as the policies for managing such risks. Comprehensive
information on the fair value of financial instruments would
enhance the transparency and accountability of financial
statements.

Guide to First-time Adoption of Ind AS |

17

Business combinations

Key differences

Ind AS 103 requires all business combinations within


its scope, except business combinations under common
control, to be accounted for under the acquisition method.
Business combinations of entities or businesses under
common control are accounted for using the pooling of
interest method.
Indian GAAP does not differentiate between common
control and other business combinations. AS 14 requires
the pooling of interest method to be applied to an
amalgamation in the nature of merger, which is an
amalgamation that satisfies certain specified conditions.
All the other amalgamations are accounted for using the
purchase method.

Under Indian GAAP, when there is an acquisition of interest


in subsidiaries, associates and joint ventures, the net
assets are recognized at book value. Contingent liabilities
of the acquiree are generally not recorded as liabilities
under Indian GAAP. For amalgamation accounted for using
the purchase method, AS 14 allows accounting to be done
on the basis of either the fair value or book value of the
assets acquired and liabilities assumed.

Ind AS 103 Business Combinations applies to most


business combinations, including amalgamations (where
the acquiree loses its existence) and acquisitions (where
the acquiree continues its existence).
Under the current Indian GAAP, there is no comprehensive
standard dealing with all business combinations. AS
14 Accounting for Amalgamations applies only to
amalgamations, i.e., when acquiree loses its existence. AS
10 Accounting for Fixed Assets applies when a business is
acquired on a lump-sum sale basis from another entity. AS
21 Consolidated Financial Statements, AS 23 Accounting
for Investments in Associates in Consolidated Financial
Statements and AS 27 Financial Reporting of Interests
in Joint Ventures apply to accounting for investment in
subsidiaries, associates and joint ventures, in the CFS
respectively.

Under Ind AS 103, acquisition accounting is based on


substance. Reverse acquisition is accounted for assuming
the legal acquirer is the acquiree.
Under Indian GAAP, acquisition accounting is based
on legal form. Indian GAAP does not deal with reverse
acquisitions.

18 | Guide to First-time Adoption of Ind AS

Ind AS 103 requires net assets taken over, including


contingent liabilities and intangible assets, to be recognized
at fair value if certain specified criteria are met.

Ind AS 103 prohibits amortization of goodwill arising on


business combinations, and requires it to be tested for
impairment annually.
Under Indian GAAP, treatment of goodwill differs in
different accounting standards. Goodwill arising from
amalgamation in the nature of purchase is amortized
to P&L over a period which may not exceed five years,
unless somewhat longer period can be justified. Goodwill
arising under AS 10, AS 21, AS 23 and AS 27 need not
be amortized though there is no prohibition. After initial
recognition, the acquirer measures goodwill at cost
less accumulated amortization, if any, and accumulated
impairment losses.

Ind AS 103 requires that contingent consideration in a


business combination should be measured at fair value
at the date of acquisition, and that this is included in
the computation of goodwill/capital reserve arising on
the business combination. Subsequent changes in the
contingent consideration are not adjusted in goodwill,
except for the measurement period adjustments.
Subsequent accounting depends on whether the
contingent consideration is equity, financial asset/financial
liability. If it is classified as equity, it is not subsequently
re-measured. If it is classified as financial asset or liability,
subsequent changes are recognized in profit or loss.
Under Indian GAAP, AS 14 requires that where the
scheme of amalgamation provides for an adjustment to
consideration contingent on one or more future events,
the amount of the additional payment is included in the
consideration and consequently goodwill, if payment is
probable and a reasonable estimate of the amount can
be made. In all other cases, the adjustment is recognized
as soon as the amount is determinable. No guidance is
available for contingent consideration arising under other
types of business combinations. This provides entities an
option to use differing practices. The common practice is
to adjust the goodwill.

Ind AS 103 specifically deals with accounting for preexisting relationships between acquirer and acquiree,
and for re-acquired rights by the acquirer in a business
combination. It requires a reacquired right/pre-existing
relationship to be recognized separately from the goodwill.
An indemnification asset is initially measured on the same
basis as the indemnified item, subject to the need for a
valuation allowance for uncollectible items.
Indian GAAP does not provide guidance for such
situations.

Ind AS 103 provides an option to measure any noncontrolling (minority) interest in an acquiree at its fair
value, or at the non-controlling interests proportionate
share of the acquirees net identifiable assets. The choice
of method is to be made for each business combination
on a transaction-by-transaction basis, rather than being a
policy choice.
Under Indian GAAP, AS 21 does not provide the first
option to measure non-controlling (minority) interest in an
acquiree at its fair value. It requires minority interest in a
subsidiary to be measured at the proportionate share of
book value of net assets.

Ind AS 103 requires that, in a business combination


achieved in stages, the acquirer re-measures any
previously- held equity interest in the acquiree at its
acquisition date fair value. The acquirer is required to
recognize the resulting gain or loss in profit or loss.
Under Indian GAAP, AS 21 recognizes step acquisitions.
However, goodwill/capital reserve computation at each
step is done on book values and historical cost basis,
rather, than fair values. Consequently, no gain/loss to be
recognized in the statement of profit and loss can arise.

Key impact
The changes brought in by Ind AS 103 are likely to affect
all stages of the acquisition process from planning to the
presentation of the post-deal results. The implications primarily
involve providing increased transparency and insight into
what has been acquired, and allowing the market to evaluate
the managements explanations of the rationale behind a
transaction.

Reflection of true value of an acquisition


Following an acquisition, financial statements of the acquirer
will look very different. Assets and liabilities will be recognized
at fair value. Contingent liabilities and intangible assets that
are not recognized in the acquirees balance sheet are likely
to be recognized at fair value in the acquirers balance sheet.
In a business combination achieved in stages, the acquirer will
re-measure its previously- held equity interest in the acquiree
at its acquisition date fair value. The acquirer will also have an
option to measure non-controlling interest at fair value at the
acquisition date. These changes in the recognition of net assets,
and the measurement of previously- held equity interests and
non-controlling interests, will significantly change the value of
goodwill recorded in financial statements. Goodwill reflected in
financial statements will project the actual premium paid by an
entity for the acquisition.

Greater transparency
Significant new disclosures are required regarding the cost of
the acquisition, the values of the main classes of assets and
liabilities, and the justification for the amount allocated to
goodwill. All stakeholders will be able to evaluate the actual
worth of an acquisition and its impact on the future cash flow of
the entity.

Significant impact on post-acquisition profits


Under Indian GAAP, net assets taken over are normally
recognized at book value, and hence, charges to the statement
of profit and account for amortization and depreciation
expenses are based on carrying value. Under Ind AS, net assets
taken over will be recognized at fair value. This will result in
a charge to profit or loss for amortization and depreciation
based on fair value, which is the true price paid by the acquirer
for those assets. Goodwill is not amortized, but is required to
be tested annually for impairment under Ind AS. Contingent
considerations that are classified as financial liabilities are
measured again through profit or loss in the subsequent period,
rather than as an adjustment to goodwill. These items will
increase volatility in the profit or loss.

Guide to First-time Adoption of Ind AS |

19

Group accounts

to the stock exchange. The amendment will allow


a company to use IFRS CFS for the Act purposes,
instead of requiring them to prepare Indian GAAP CFS.
This option is available only for one year, i.e., financial
year beginning 1 April 2014 for a company having 31
March year-end.

Key differences

Under Ind AS 110 Consolidated Financial Statements,


each parent is required to present consolidated financial
statements (CFS), in which it consolidates all its
subsidiaries, subject to limited exemptions and exceptions.
A parent need not present CFS if it meets all the
following conditions:

It is a wholly- owned subsidiary or is a partially- owned


subsidiary of another entity and all its other owners,
including those not otherwise entitled to vote, have
been informed about, and do not object to, the parent
not presenting CFS

Under Ind AS, a company will need to consider both Ind AS


and the Act requirements to decide for preparation of CFS.
Since there are differences in the requirements of two, the
stricter of the two requirements is likely to apply.

Its debt or equity instruments are not traded in a


public market (a domestic or foreign stock exchange
or an over-the-counter market, including local and
regional markets)
It did not file, nor is it in the process of filing, its
financial statements with a securities commission
or other regulatory organization for the purpose of
issuing any class of instruments in a public market,
and

Its ultimate or any intermediate parent produces CFS


that are available for public use and comply with
Ind AS.

20 | Guide to First-time Adoption of Ind AS

Ind AS 110 does not contain any exception for


consolidation of subsidiaries other than exception related
to investment entities.
AS 21 precludes consolidation of a subsidiary when either
of the following conditions are met. In the CFS, such
subsidiaries are accounted under AS 13 and the reasons
for not consolidating are disclosed.

An intermediate wholly owned subsidiary is not


required to prepare CFS, provided its holding company
is located in India.
On 16 January 2015, the MCA issued an amendment
to the Companies Accounts Rules prescribing
exemption for companies having one or more overseas
subsidiaries. Though the amendment wordings are
not clear, it appears that the amendment allows
companies, having one or more foreign subsidiaries
to prepare CFS as per any GAAP, instead of Indian
GAAP. For example, a listed company having foreign
subsidiaries is preparing IFRS CFS for submission

Under Ind AS 110, an investment entity that meets the


specified definition is not required to present CFS. It is
required to measure investments in all its subsidiaries,
other than those that provide services relating to the
investment entitys investment activities, at fair value
through profit or loss.
There is no such exception for investment entities under
Indian GAAP.

Under Indian GAAP, AS 21 does not mandate preparation


of CFS. The Act requires that from accounting periods
beginning or after 1 April 2014, all companies will prepare
CFS. However, it contains the following exemptions:

Companies having only associates and/or joint venture


and no subsidiaries are required to prepare CFS from
financial year beginning on or after 1 April 2015,
instead of 1 April 2014.

Control is intended to be temporary because a


subsidiary is acquired and held exclusively with a
view to its subsequent disposal in the near future
(generally, twelve months).
A subsidiary operates under severe long-term
restrictions, which significantly impair its ability to
transfer funds to the parent.

Ind AS 110 contains wide and substance-based


definition of control. It identifies the principles of control,
determines how to identify whether an investor controls
an investee and therefore, must consolidate the investee.
In accordance with Ind AS 110, an investor controls an
investee if and only if the investor has all of the following
elements:

Power over the investee, i.e., the investor has


existing rights that give it the ability to direct the
relevant activities (the activities that significantly
affect the investees returns). Such rights can either
be straightforward (e.g., through voting rights)
or be complex (e.g., embedded in contractual
arrangements). An investor holding only protective
rights cannot have power over an investee.

Exposure, or rights, to variable returns from its


involvement with the investee. Such returns must
have the potential to vary as a result of the investees
performance and can be positive, negative, or both.
Ability to use its power over the investee to affect the
amount of the investors returns. A parent must not
only have power over an investee and exposure or
rights to variable returns from its involvement with the
investee, a parent must also have the ability to use its
power over the investee to affect its returns from its
involvement with the investee.

Under Ind AS 110, the existence of potential voting rights


(e.g., options, convertible debentures) that are substantive
are considered to assess whether an investor has power
over an investee. Factors that are considered to assess
whether potential voting rights are substantive include
the exercise price, the financial ability of the investor to
exercise and the exercise period.
AS 21 is silent on whether potential voting rights are
to be considered for control. However, under AS 23,
potential voting rights are not considered for determining
significant influence in the case of an associate. Therefore,
an analogy can be drawn that in the case of a subsidiary
as well, potential voting rights are not to be considered for
deciding control.

Ind AS 110 states an investor might have control over


an investee even when it has less than a majority of the
voting rights of that investee. The control exists if its
rights are sufficient to give it power when the investor
has the practical ability to direct the relevant activities of
the investee unilaterally (a concept known as de facto
control). When assessing whether an investors voting
rights are sufficient to give it power, an investor considers
all facts and circumstances, including:

Potential voting rights held by the investor, other vote


holders or other parties
Rights arising from other contractual arrangements,
and
Any additional facts and circumstances that indicate
the investor has, or does not have, the current ability
to direct relevant activities at the time that decisions
need to be made, including voting patterns at previous
shareholders meetings.

The concept of Defacto Control does not exist under


Indian GAAP.

Under Indian GAAP, AS 21 defines control as ownership


of majority voting rights and/or power to control the
composition of the board of directors.

Size of the investors holding of voting rights relative


to the size and dispersion of holdings of other vote
holders

Ind AS 110 introduces a new concept of delegated power.


An investor may delegate decision-making authority to an
agent on some specific issues or on all relevant activities,
but, ultimately, the investor, as principal, retains the power.
An agent is a party engaged to act on behalf of another
party (principal), but which does not have control over the
investee. Accordingly, a decision maker that is not an agent
is a principal. It is necessary to assess whether the decision
maker is acting as a principal or an agent, to determine
whether the decision maker is deemed to have control. Ind
AS 110 provides guidance to analyze control, by asking
whether the decision maker, is acting as a principal, or
as an agent that is acting primarily on behalf of other
investors.
The concept of Delegated Power does not exist under
Indian GAAP.

Ind AS 110 introduces a new term structured entities


(SE), which is an entity whose activities are restricted to
the extent that they are not directed by a governing body.
Ind AS 110 does not have bright-line requirements
setting out when a reporting entity should consolidate
an SE. Rather, an entity needs to consider all facts and
circumstances to determine whether it has the power to
direct the activities that cause the returns of the SE
to vary.

Guide to First-time Adoption of Ind AS |

21

The concept of SE does not exist under Indian GAAP.


Under Ind AS 110, compliance with uniform accounting


policies is mandatory. If a member of the group uses
accounting policies, other than those adopted in the
CFS, for like transactions and events in comparable
circumstances, appropriate adjustments are made to
its financial statements in preparing the CFS to ensure
conformity to the groups accounting policies.
Ind AS 28 provides an exemption from the requirement
concerning uniform accounting policy on the grounds
of impracticality only in case of associates (not for
subsidiaries and joint ventures). Under Ind AS, applying a
requirement is impracticable when the entity cannot apply
it after making every reasonable effort to do so.
AS 21 requires that CFS should be prepared using uniform
accounting policies for like transactions and other events
in similar circumstances. If it is not practicable to use
uniform accounting policies in preparing the CFS, that fact
should be disclosed together with the proportions of the
items in the CFS to which the different accounting policies
have been applied. Indian GAAP provides an exemption
on the grounds of impracticality for consolidation of
subsidiaries, associates and joint venture.

AS 21 requires that in calculating gain/loss arising


from the loss of control, retained interest in the former
subsidiary is measured at proportionate amounts of its
carrying value at the date when control is lost.

Joint ventures

Ind AS 111 classifies joint arrangements into:


Ind AS allows a maximum of three-month gap between the


financial statements of a parent or investor and those of its
subsidiary, associate or joint-ventures.

Under Ind AS, changes in ownership interests of a


subsidiary (that do not result in the loss of control) are
accounted for as an equity transaction, and have no impact
on goodwill or the statement of profit and loss.
Indian GAAP does not provide any guidance on changes
in ownership interest of a subsidiary that do not result in
loss of control. This has resulted in existence of diverse
practices on the matter.

Under Ind AS 111 Joint Arrangements, joint control is the


contractually agreed sharing of control of an arrangement,
which exists only when decisions about relevant activities,
i.e., those that significantly affect the returns of the
arrangement, require the unanimous consent of parties
sharing control.
Under AS 27, joint control is the contractually agreed
sharing of control over an economic activity. Control is the
power to govern the financial and operating policies of an
economic activity so as to obtain benefits from it.

Indian GAAP allows a six-month gap for subsidiaries and


jointly-controlled entities. For associates, there is no
maximum time gap prescribed.

Under Ind AS, in calculating gain/loss arising from the loss


of control in CFS, retained interest in the former subsidiary
is measured at its fair value at the date when control is
lost.

Ind AS requires losses incurred by the subsidiary to be


allocated between the controlling (parent) and noncontrolling (minority) interests, even if it results in deficit
balance of non-controlling interest.
Under Indian GAAP, excess losses attributable to minority
shareholders over the carrying amount of minority interest
are adjusted against the majority interest, unless the
minority has a binding obligation to, and is able to, fund
the losses.

22 | Guide to First-time Adoption of Ind AS

Joint operations whereby the parties that have joint


control of the arrangement have rights to assets,
and obligations for the liabilities, relating to the
arrangement.
Joint venture whereby the parties that have joint
control of the arrangement have rights to the net
assets of the arrangement.

AS 27 identifies three types of joint ventures jointly


controlled operations, jointly controlled assets and jointly
controlled entities.

Under Ind AS 111, the structure of the arrangement is


no longer the main factor in determining the accounting.
An arrangement, which is structured through a separate
vehicle, is not automatically classified as a joint venture.
An assessment of the legal form of the separate vehicle,
contractual terms and conditions and other facts and
circumstances is still required before classifying an
arrangement as a joint venture.
AS 27 uses only a legal entity or structure-based
distinction between its joint-controlled entities and all
other joint ventures. Accordingly, if an arrangement is
structured in a separate legal entity, it is automatically
classified as jointly controlled entity.

Under Ind AS 111, a joint venturer recognizes its interest


in a joint venture as an investment and accounts for that
investment using the equity method in accordance with Ind
AS 28 Investments in Associates and Joint Ventures.
According to AS 27, in its consolidated financial
statements, a venturer reports its interest in a jointly
controlled entity using the proportionate consolidation.

Key impact
Changes in the group structure
Application of Ind AS 110 may significantly amend existing
group structures as companies may need to consolidate
additional subsidiaries based on criteria such as Defacto
control, structured entities and potential voting rights.
Moreover, some of the existing entities may get deconsolidated.
Companies will need to update their existing group structures
and start coordinating with new group entities so that they get
timely information for all entities to prepare CFS.
Changes in group structure, as mentioned above, along with
other Ind AS changes may significantly impact financial
performance and financial position. It is necessary that entities
start communicating such impacts to their stakeholders in
advance to avoid sudden impact. Moreover, companies may
need to renegotiate loan covenants based on their financial
performance and financial position under Ind AS.

Exercise of significant judgment


Determination of control will become more judgmental. This is
particularly relevant with regard to consideration of items as
options and convertible instruments, structured entities and
Defacto control. Since Ind AS 110 does not contain any bright
line test on such determination, it is important that companies
consider all the facts and circumstances in a comprehensive
manner to arrive at an appropriate conclusion.

Continuous assessment
Ind AS 110 requires control to be assessed on a continuous
basis. This is particularly relevant in marginal cases and may
have in, out and in situation from one period to the next. For
example, in case of Defacto control, a relatively small change
in the shareholding pattern of an investee company may fail
the control test. In subsequent periods, the entity may be able
to achieve Defacto control again. This will result in significantly
different numbers being used for consolidation.

Uniform accounting policies


The current Indian GAAP provides an exemption from the
use of uniform accounting policies for the consolidation of
subsidiaries, associates and joint ventures on the grounds of
impracticality. Ind AS does not provide such an exemption,
other than for associates, and mandates the use of uniform
accounting policies for subsidiaries and joint ventures. This
is likely to pose significant challenges. All entities will have to
gear their systems, or develop systems such as preparation
of group accounting manuals, to ensure compliance with this
requirement. On conversion to Ind AS, many group entities will
have to change their accounting policies to bring them in line
with the parent entity.

Financial year-ends of all components in the group


The current Indian GAAP allows a maximum of six months gap
between financial statements of a parent and a subsidiary, and
that of a venturer and a joint venture. There is no maximum
time limit prescribed for gap between financial statements of
an investor and an associate. Ind AS allows a maximum of three
months gap for subsidiaries, associates and joint ventures. On
conversion to Ind AS, many companies may be compelled to
change year-ends of their group entities to comply with this
requirement and to avoid reporting results at multiple dates.

Service concession
arrangements
Key differences
Under Indian GAAP, notified accounting standards do not deal
with accounting for service concession arrangements (SCAs).
In 2014, the ICAI has issued an exposure draft of the Guidance
note on Accounting for Service Concession Arrangements
by Concessionaires, which has not yet been finalized. In the
absence of authoritative guidance, differing practices seem to
have emerged to account for such arrangements and many
companies seem to have followed differing practices. For
instance, some companies have recognized infrastructure
asset as a fixed asset, while others have recognized it as an
intangible asset. Many companies do not recognize any revenue
and profits during the construction period.

Guide to First-time Adoption of Ind AS |

23

Appendix C Service Concession Arrangements of Ind AS 115


applies to public-to-private SCAs if they satisfy specified
conditions. Applicability of Appendix C is restricted to publicto-private service concession arrangements (SCAs). Appendix
C does not apply to all public-to-private SCAs. Rather, it
prescribes the following criteria, all of which need to be met, for
an arrangement to be within its scope:

Grantor controls or regulates what services the operator


must provide with the infrastructure, to whom it must
provide them and at what price.
Grantor controls, through ownership, beneficial
entitlement or otherwise, any significant residual interest
in infrastructure at the end of the arrangement period.

Appendix C of Ind AS 115 states that due to contractual service


arrangement, the operator does not have a right to control the
use of public service infrastructure covered within its scope.
Rather, operator has access to operate the infrastructure for
providing public service on behalf of grantor. Hence, operator
should not recognize infrastructure covered within the scope
of Appendix C as its property, plant and equipment (PPE). In
substance, the operator acts as a service provider under the
arrangement. It constructs/upgrades (construction service) the
infrastructure used to provide public service, as well as operates
and maintains (operation services) the same for a specified
period. Hence, it will recognize and measure revenue arising
from construction and operation services in accordance with Ind
AS 115. The operator may receive (a) intangible assets (right to
collect toll charges), (b) finance asset (right to receive annuity
payments, for example, from the government authority), or
(c) both against the services rendered. Hence, it will recognize
consideration receivable as such in the financial statements.
Under the intangible asset model, toll charges collected from
users are recognized as revenue. Simultaneously, the company
charges amortization of intangible asset to the statement
of profit and loss. The financial asset model works similar
to accounting for finance lease receivables, where amounts
received are allocated between capital recovery and interest,
using the effective interest method.

Amortization of intangible assets


Ind AS 38 requires an intangible asset to be amortized over
its expected useful life. In accordance with Ind AS 38, several
methods may be used for amortization of an intangible asset
with finite useful life. These methods include straight-line
method, diminishing balance method and unit of production
method. The methods used should be selected on the basis of

expected pattern of consumption. For example, in a toll road


concession, some argue that the number of vehicles using the
road may be regarded as reflecting the pattern of consumption.
Ind AS 38 prohibits the use of revenue-based amortization
method. It states that an amortization method on revenue
generated by an activity is inappropriate because it generally
reflects factors other than the consumption of economic
benefits of the asset. For example, revenue is affected by other
inputs and processes, selling activities and changes in sales
volumes and prices. The price component of revenue may be
affected by inflation, which has no bearing upon the way in
which an asset is consumed.
Under Indian GAAP, Schedule II to the Act allows companies to
use revenue-based amortization for toll roads created under
SCA. Considering this, certain companies amortize their toll
roads using revenue-based amortization. Ind AS 101, read
with Ind AS 38 scope paragraph, allows these companies an
option to continue revenue-based amortization for toll roads
recognized in the financial statements for period immediately
before the beginning of the first Ind AS financial statements2.
It should be noted that this is an option. In other words, toll
operators are free to use other basis that reflect the pattern
of consumption, for example, the straight line method or
amortization based on utilization of the road by vehicles.
However, such amortization will not be allowed for any new toll
road arising from SCA entered into after implementation of
Ind AS.

Key impact
Impact on revenue
Classification of the arrangement into intangible or financial
asset under Ind AS will have a significant impact on the contract
revenues recognized. For example, accounting under the
intangible model would result in double the revenues compared
to a contract with nearly identical cash flows that is accounted
for using the financial asset model. Selection of the model to be
applied is not an option. Rather, the model flows from whether
the operator has the right to charge for services (intangible
model) or the right to receive cash flows from the grantor
(financial asset). This may require careful analysis, since a
contract that initially appears to fall within the intangible model
may have an element of guaranteed cash flows. For example,
if during early years of the contract, the government body
guarantees a minimum level of revenues from the operation of
a new expressway to encourage private investment, there may
be both a financial asset and an intangible asset.

2 Please also refer the booklet titled IFRS-converged Indian Accounting Standards Outreach meeting dated 15 January 2015, published by the Accounting Standards
Board of the ICAI.

24 | Guide to First-time Adoption of Ind AS

Estimates and fair values


Ind AS accounting for SCAs would involve an extensive use
of estimates and valuations, which are expected to have a
significant impact on the companys financial statements.
For example, construction revenues and costs need to be
recognized for construction of the infrastructure. Since the
contract is unlikely to specify separately the revenue from
construction, it is necessary to allocate the contract revenues
into various distinct individual performance obligations, i.e.,
construction, operations, maintenance, etc., based on their
relative stand-alone selling prices. Companies may need to use
either internal or external benchmarking for similar contracts,
since an assessment of profitability on a SCA is normally made
on an overall IRR basis and not separately for the construction
and operation phases of the project.

Project finance implications


Two factors may impact the availability of project finance for
contracts accounted under Appendix C. First, the PPE will be
de-recognized from the balance sheet and replaced with either
a financial or an intangible asset. Secondly, accounting for
SCA will result in a mismatch between book profits and actual
cash flows, particularly in case of a vanilla intangible asset
model where profits on construction may be recognized several
years in advance of the actual operating cash inflow. Financial
institutions may need to be educated to focus attention on
project cash flows instead of fixed assets and profits, so that
companies are not disadvantaged on applying Appendix C. In
the case of existing projects, companies will need to review loan
covenants to assess whether the terms or covenants need to be
adjusted in light of the different accounting model. A technical
breach could occur, for example, if intangible or financial assets
are not included in ratio tests applied in the loan covenant.

Income taxes
Key differences

AS 22 Accounting for Taxes on Income is based on the


income statement liability method, which focuses on
timing differences. Ind AS 12 Income Taxes is based on
the balance sheet liability method, which focuses on
temporary differences. One example of temporary vs.
timing difference approach is revaluation of fixed assets.
Under Indian GAAP, no deferred tax is recognized on
upward revaluation of fixed assets where such revaluation
is credited directly to revaluation reserve. Under Ind AS,
companies will recognize deferred tax on revaluation
component if certain other recognition criteria are met.
Ind AS 12 requires the recognition of deferred taxes in
case of business combinations. Under Ind AS, the cost of a
business combination is allocated to the identifiable assets
acquired and liabilities assumed by reference to their fair
values. However, if no equivalent adjustment is allowed for
tax purposes, it would give rise to a temporary difference.
Under Indian GAAP, business combinations (other than
amalgamation) do not give rise to such deferred tax
adjustment.

Ind AS 12 requires that when an entity has a history of


tax losses, it recognizes deferred tax asset arising from
unused tax losses or tax credits only to the extent that it
has sufficient taxable temporary differences, or there is
other convincing evidence that sufficient taxable profit
will be available against which deferred tax asset can be
realized. Ind AS 12 does not lay down any requirement for
consideration of virtual certainty in such cases.
AS 22 under Indian GAAP requires that if the entity has
carried forward tax losses or unabsorbed depreciation, all
deferred tax assets are recognized only to the extent that
there is virtual certainty supported by convincing evidence
that sufficient future taxable income will be available
against which such deferred tax assets can
be realized.

Guide to First-time Adoption of Ind AS |

25

Under Ind AS, an entity should recognize a deferred


tax liability in CFS for all taxable temporary differences
associated with investments in subsidiaries, branches
and associates, and interests in joint ventures, except to
the extent that the parent, investor or venturer is able to
control timing of the reversal of temporary difference, and
it is probable that the temporary difference will not reverse
in the foreseeable future.
Under Indian GAAP, deferred tax is not recognized on
such differences. Deferred taxes in the CFS are a simple
aggregation of the deferred tax recognized by various
group entities.

Under Ind AS, deferred taxes are recognized on temporary


differences that arise from the elimination of profits and
losses resulting from intra-group transactions.
Under Indian GAAP, deferred tax is not recognized on
such eliminations. Deferred taxes in the CFS are a simple
aggregation of the deferred tax recognized by various
group entities.

Disclosure required for income taxes is likely to increase


significantly on transition to Ind AS. Examples of certain
critical disclosures mandated in Ind AS are: an explanation
of the relationship between tax expense (income) and
accounting profit; an explanation of changes in the
applicable tax rate(s) compared to the previous accounting
period; the amount (and expiry date, if any) of deductible
temporary differences, unused tax losses, and unused tax
credits for which no deferred tax asset is recognized in the
balance sheet.
Under Indian GAAP, such disclosures are not required.

26 | Guide to First-time Adoption of Ind AS

Key impact
Deferred tax accounting for the group
Under Indian GAAP, deferred taxes in the CFS are a simple
aggregation of the deferred tax recognized by various group
entities. On transition to Ind AS, deferred taxes in the CFS will
be significantly different from that under Indian GAAP. This is
because of GAAP differences explained above, especially with
respect to undistributed profits of subsidiaries, associates and
joint ventures and intra-group transactions.

Acquisitions
Deferred tax is recognized on fair value adjustment of acquired
assets, liabilities and contingent liabilities recorded as part of
business combination accounting. Goodwill under Ind AS is
determined accordingly. Reversal of deferred tax asset/liability
in future years affects the tax expense or income of those
years. Therefore, the effect of acquisition on deferred taxes in
future financial statements will differ significantly under Ind AS
and Indian GAAP.

Entities in tax losses


Due to the strict principle of virtual certainty under Indian
GAAP, only in very rare cases can entities recognize deferred
tax assets where they have carried forward losses and
unabsorbed depreciation. The convincing evidence principle
under Ind AS is less stringent in comparison. Hence, the
probability of recognizing deferred tax assets on carried
forward tax losses and unabsorbed depreciation is higher
under Ind AS. However, it will continue to require exercise of
significant judgment.

Employee benefits and


share-based payments
Key differences

Under Ind AS 19, unvested past-service costs are


recognized immediately as they occur, rather than being
spread over the vesting period.
AS 15 requires that an entity should recognize unvested
past service cost as an expense on a straight-line basis over
the average period until the benefits become vested.

Under Ind AS, liability for termination benefits has to be


recognized at the earlier of when the entity can no longer
withdraw the offer of those benefits and when the entity
recognizes a restructuring cost.
Indian GAAP requires termination benefits liability to be
recognized only when the entity has a present obligation
as a result of a past event, it is probable that an outflow of
resources embodying economic benefits will be required to
settle the obligation, and a reliable estimate can be made
of the amount of the obligation.

Ind AS 19 has significantly enhanced disclosure


requirements for defined benefit plans. New disclosures
mandated under Ind AS require information that explains
the characteristics of its defined benefit plans and risks
associated with them. These disclosures also reflect
a sensitivity analysis for each significant actuarial
assumption as of the end of the reporting period, showing
how the defined benefit obligation would have been
affected by changes in the relevant actuarial assumption
that were reasonably possible at that date. The fair value
of the plan assets should be disaggregated into classes
that distinguish the nature and risks of those assets,
subdividing each class of plan asset into those that have a
quoted market price in an active market and those that
do not.

Ind AS 102 Share-based Payment applies to both employee


and non-employee share-based payments.
Under Indian GAAP, the Guidance Note on Accounting
for Employee Share-based Payments, issued by the ICAI,
covers only employee share based payments.

Ind AS 19 Employee Benefits requires the impact of


remeasurement in net defined benefit liability (asset)
to be recognized in other comprehensive income (OCI).
Remeasurement of net defined benefit liability (asset)
comprises actuarial gains or losses, return on plan assets
(excluding interest on net asset/liability) and any change in
effect of asset ceiling.
AS 15 Employee Benefits under current Indian GAAP
requires such actuarial gains and losses to be recognized in
the statement of profit and loss.

Under Ind AS, employee share-based payments should


be accounted for using the fair value method. Only in
extremely rare circumstances, the entity is permitted to
measure the equity instruments at their intrinsic value.
Indian GAAP permits an option of using either the intrinsic
value method or the fair value method. However, the entity
using the intrinsic value method is required to give fair
value disclosures.

In case of graded vesting, Ind AS 102 requires an entity


to determine the vesting period for each portion of the
option separately, and amortize the compensation cost of
each such portion on a straight-line basis over the vesting
period of that portion. The option to recognize the expense
over the service period for the entire award period is not
available.
Under Indian GAAP, the ICAI GN provides the following two
options in this regard:

Determine the vesting period for each portion of the


option separately, and amortize the compensation
cost of each such portion on a straight-line basis over
the vesting period of that portion.
The amount of employee compensation cost is
accounted for and amortized on a straight-line basis
over the aggregate vesting period of the entire option
(that is, over the vesting period of the last separately
vesting portion of the option). However, the amount
of employee compensation cost recognized at any
date should at least equal the fair value or the intrinsic
value, as the case may be, of the vested portion of the
option at that date.

Guide to First-time Adoption of Ind AS |

27

Ind AS 102 deals with various issues arising from


accounting for group and treasury share transactions.
It requires the subsidiary, whose employees receive
such compensation, to measure services received
from its employees in accordance with Ind AS 102 with
a corresponding increase recognized in equity as a
contribution from the parent. Ind AS 102 also clarifies
accounting for group cash-settled, share-based payment
transactions in the separate (or individual) financial
statements of an entity receiving the goods or services
when another group entity or shareholder has the
obligation to settle the award.
Under Indian GAAP, detailed guidance on issues arising
from such transactions is not available. Common
practice is that the entity whose employees receive such
compensation does not account for any compensation cost
because it does not have any settlement obligation.

Key impact
Reduced volatility in profit or loss
In the case of defined benefit plans, actuarial gains and losses
arise due to changes in actuarial assumptions, such as with
respect to discount rate, increase in salary, employee turnover,
mortality rate, etc. The requirement to account for actuarial
gains and losses in OCI will reduce volatility in the statement of
profit and loss.

Timing of recognition of termination benefits


Under Ind AS, termination benefits are required to be provided
when the scheme is announced and the management is
demonstrably committed to it. Under Indian GAAP, termination
benefits are required to be provided for based on legal liability
(when employee signs up for the Voluntary Retirement Scheme
(VRS) rather than constructive liability). Hence, there could be
timing difference between creating a liability under Ind AS and
Indian GAAP.

28 | Guide to First-time Adoption of Ind AS

True value of ESOP


Indian GAAP permits entities to account for Employee Stock
Ownership Plans (ESOPs), either through the fair value method
or the intrinsic value method though disclosure is required to be
made of the impact on profit or loss of applying the fair value
method. It is observed that most Indian entities prefer to adopt
the intrinsic value method. The drawback of this method is that
it does not factor in option and time value when determining
compensation cost. Under Ind AS, accounting for ESOPs will
have to be remeasured using the fair value method. This
may result in increased charges for ESOPs for many entities,
and may have a significant impact on key indicators such as
earnings per share.

Accounting for share-based payments to


non-employees
It has been observed that many entities are entering into
partnership agreements with their vendors to provide them
with opportunities of sharing profits of a particular venture by
offering them share-based payments. This mode of payment is
considered as an incentive tool intended to encourage vendors
to complete efficient and quality work. Under Indian GAAP, AS
10 requires a fixed asset acquired in exchange for shares to
be recorded at its fair market value or the fair market value of
the shares issued, whichever is more clearly evident. For other
goods and services, there is no guidance on recognizing the
cost of providing such benefits to vendors in lieu of goods or
services received. Consequently, different accounting policies
are being followed by Indian entities under current Indian GAAP.
On transition to Ind AS, an entity will have to account for such
benefits under the fair value method laid down in Ind AS 102.

Accounting for group ESOPs


In India, a subsidiary normally does not account for ESOPs
issued to its employees by its parent entity, contending that
clear-cut guidance is not available and it does not have any
settlement obligation. Under Ind AS 102, such ESOPs will
have to be accounted for according to principles laid down in
Ind AS 102, i.e., either as equity-settled or as cash-settled
plans, depending on specific criteria. In accordance with
Ind AS 102, a receiving entity whose employees are being
provided ESOP benefits by a parent will have to account
for the charge. This will reflect true compensation cost of
receiving employee benefits.

Property, plant and


equipment, intangible
assets, investment
property, inventories
and impairment
Key differences

Under Indian GAAP, AS 29 Provisions, Contingent


Liabilities and Contingent Assets also requires upfront
provision to be created for obligation to rectify the
damage. However, such provision should be recognized
at undiscounted amount. AS 10 or any other accounting
standard does not provide any specific guidance on how
the corresponding amount should be adjusted, except that
the Guidance Note on Accounting for Oil and Gas Producing
Activities states that entities involved in those activities
should capitalize the dismantling and site restoration cost.

Property, plant and equipment


Ind AS 16 Property, Plant and Equipment mandates


component accounting, whereas AS 10 Accounting
for Fixed Assets recommends, but does not require it.
However, the Act requires companies to apply component
accounting mandatorily from the financial years
commencing 1 April 2015.
Major repairs and overhaul expenditure are capitalized
under Ind AS 16 as replacement costs, if they satisfy the
recognition criteria. In most cases, Indian GAAP requires
these to be charged off to the statement of profit and loss
as incurred.
In accordance with Ind AS 16, cost of an item of PPE
is its cash price equivalent at the recognition date. If
the payment is deferred beyond normal credit terms,
difference between the cash price equivalent and total
payment is charged as interest expense to the statement of
profit and loss over the credit period, unless such interest
is capitalized under Ind AS 23 Borrowing Costs.
Except in the case of assets acquired on hire purchase, AS
10 does not require entities to separate finance element
even if an asset is purchased on deferred payment basis.
The general practice is not to discount the future
cash flows.

In accordance with Ind AS 16, the cost of an item of PPE


includes initial estimate of the costs of dismantling and
removing the item, and restoring the site on which it is
located, the obligation for which an entity incurs either
when the item is acquired or as a consequence of having
used the item during a particular period for purposes
other than to produce inventories during that period.
In accordance with Ind AS 37 Provisions, Contingent
Liabilities and Contingent Assets, the provision is created
at the discounted amount.

Under Indian GAAP, paragraph 46A of AS 11 The Effects


of Changes in Foreign Exchange Rates allows companies to
adjust exchange differences arising on long-term foreign
currency monetary item to the carrying value of PPE.
However, such an option is not allowed under Ind AS 21
The Effects of Changes in Foreign Exchange Rates. Please
refer discussion under the head The effects of changes in
foreign exchange rates for further details.
Schedule II to the Act, prescribes useful lives for various
items of PPE. It also fixes residual value for items of PPE
at 5% of the original cost. If a company adopts a useful life/
residual value different from that specified in Schedule II,
the financial statements should disclose such difference
and provide justification in this behalf duly supported by
technical advice. In accordance with the approach used in
AS 6, a company has an option of treating the useful lives
and residual value prescribed in Schedule II as maximum
limit. Alternatively, the management can use the same as
indicative only. The interaction of Schedule II and AS 6 is
explained below:

The management has estimated the useful life of an


asset to be 10 years. The life envisaged under the
Schedule II is 12 years. In this case, AS 6 requires
the company to depreciate the asset using 10 year
life only. In addition, Schedule II requires disclosure
of justification for using the lower life. The company
cannot use 12 year life for depreciation.
The management has estimated the useful life of an
asset to be 12 years. The life envisaged under the
Schedule II is 10 years. In this case, the company has
an option to depreciate the asset using either 10 year
life prescribed in the Schedule II or the estimated
useful life, i.e., 12 years. If the company depreciates
the asset over the 12 years, it needs to disclose
justification for using the higher life. The company
should apply the option selected consistently.
Similar position will apply for the residual value.

Guide to First-time Adoption of Ind AS |

29

AS 26 does not contain any such rebuttable presumption


for amortization method based on revenue. Under Indian
GAAP, Schedule II to the Act allows revenue-based
amortization for toll roads created under the service
concession arrangements (SCA). Considering this, certain
Indian companies amortize their toll roads using revenuebased amortization. For further details on this matter,
refer discussion under the head Service concession
arrangements.

Under Ind AS 16, an item of PPE is depreciated based


on its estimated useful life and residual value. It is not
acceptable to treat useful lives/residual value prescribed
under Schedule II as maximum limit. However, if the
managements estimate of useful life and/or residual
value is different vis--vis those prescribed in Schedule
II, companies will need to disclose justification for using
different useful life/residual value.

Ind AS 16 requires estimates of useful lives, depreciation


method and residual values to be reviewed at least at the
end of each financial year. Indian GAAP does not mandate
an annual review of these, but recommends periodic review
of useful lives.
Under Indian GAAP, any change in depreciation method
is treated as an accounting policy change and applied
retrospectively. Under Ind AS, it is treated as a change in
accounting estimate and applied prospectively.
Both Ind AS and Indian GAAP permit the revaluation model
for subsequent measurement. If an asset is revalued, Ind AS
16 mandates revaluation to be done for the entire class of
property, plant and equipment to which that asset belongs,
and the revaluation to be updated periodically. Under Indian
GAAP, revaluation is not required for all the assets of the
given class. It is sufficient that the selection of the assets
to be revalued is done systematically, e.g., an entity may
revalue a class of assets of one unit and ignore the same
class of assets at other location. Also, there is no need to
update revaluation regularly under Indian GAAP.

Intangible assets

Under Ind AS, an entity can choose revaluation model for


subsequent measurement provided, there is an active
market for the underlying intangible assets. Revaluation of
intangible assets is prohibited under Indian GAAP.
Ind AS 38 contains a rebuttable presumption that an
amortization method based on the revenue generated by
an activity that includes the use of an intangible asset is
inappropriate and this presumption can be overcome only
under limited circumstances.

30 | Guide to First-time Adoption of Ind AS

Ind AS 38 requires an expenditure on advertising and


promotional activities to be recognized as an expense
when it is incurred. It further clarifies that an entity incurs
this expenditure when it has an access to the underlying
goods or when it receives the services. Therefore, it cannot
defer the recognition of expenditure on advertising and
promotional activities till these are delivered to customers.
AS 26 does not provide any such guidance. It is understood
that under Indian GAAP, entities normally follow the
practice of recognizing goods or services received for future
advertising or promotional activities as an asset till these
are delivered to the customers.

Investment property

Under Ind AS 38 Intangible Assets, an intangible asset can


have indefinite useful lives. Such assets are required to be
tested for impairment at least on an annual basis and are
not amortized.
Under Indian GAAP, AS 26 Intangible Assets does not
recognize the concept of indefinite useful life of intangible
assets. Rather, it contains a rebuttable presumption that
useful life of an intangible asset should not exceed
10 years.

Ind AS 40 Investment Property prescribes accounting


and disclosure requirements for investment property in a
detailed manner. Under Indian GAAP, AS 13 Accounting
for Investment deals with investment property in a brief
manner.
Under Ind AS 40, investment property is measured using
the cost model, i.e., at cost less accumulated depreciation
and accumulated impairment, if any.
AS 13 requires investment property to be accounted
for as long-term investment, i.e., at cost less other than
temporary diminution in the value of property. Depreciation
on investment property is required to be provided according
to DCA Circular (10) CLVI/61 dated 27 September 1961
and under AS 6. Hence, depreciated cost model is applied
for subsequent measurement

Ind AS 40 requires all entities to disclose the fair value of


its investment properties even though they are measured
using the cost model.
Indian GAAP does not mandate fair value disclosures for
investment property.

Inventories

Ind AS 2 Inventories excludes from its scope only the


measurement of inventories held by producers of minerals
and mineral products, to the extent they are measured at
net realizable value in accordance with well-established
practices in those industries. It also states that any gains/
losses arising from measuring inventories at net realizable
value are recognized in profit or loss in the period of change.
AS 2 Valuation of Inventories excludes from its scope all
aspects of accounting for producers inventories of mineral
oils, ores and gases, to the extent that they are measured
at net realizable value in accordance with well-established
practices in those industries.

Impairment of assets

AS 28 Impairment of Assets does not apply to impairment


of the above assets.

Ind AS 2 acknowledges that a broker-trader may decide to


measure its inventories at fair value less cost to sell. If this
is the case, Ind AS 2 does not apply to measurement of
inventories and broker-traders recognize gain/loss arising
from measurement at fair value less cost to sell in profit or
loss for the period.

AS 2 excludes from its scope the work in progress arising (i)


in the ordinary course of business of service providers, and
(ii) under construction contracts.
Ind AS 2 does not contain these scope exclusions. Rather, it
states that costs incurred to fulfil a contract with a customer
that do not give rise to inventories (or assets within the
scope of another Ind AS) are accounted for in accordance
with Ind AS 115.

An intangible asset with an indefinite useful life

An intangible asset that is not yet available for use

Goodwill acquired in a business combination

Ind AS 2 requires that where inventory is acquired on


deferred settlement terms, the entity should identify finance
element separately. The difference between the cash
price equivalent and the total payment is recognized as an
interest over the period of financing.

Both under Ind AS 2 and AS 2, specific identification, FIFO


and weighted average cost methods are acceptable methods
of determining cost. However, their criterion for the use of
methods is different. Ind AS 2 requires that the same cost
formula should be used consistently for all inventories that
have a similar nature and use to the entity. AS 2 requires
that the formula used should reflect the fairest possible
approximation to the cost incurred in bringing the items of
inventory to their present location and condition.

An intangible asset that is not yet available for use


An intangible asset that is amortized over a period
exceeding 10 years from the date when the asset is
available for use.

Under Ind AS 36, goodwill is allocated to cash generating


units (CGUs) or groups of CGUs that are expected to
benefit from the synergies of the business combination
from which it arose. There is no bottom-up or top-down
approach for allocation of goodwill.
Under AS 28, goodwill is allocated to CGUs only when the
allocation can be done on a reasonable and consistent
basis. If that requirement is not met for a specific CGU
under review, the smallest CGU to which the carrying
amount of goodwill can be allocated on a reasonable and
consistent basis must be identified and the impairment test
carried out at this level. Therefore, when all or a portion of
goodwill cannot be allocated reasonably and consistently
to the CGU being tested for impairment, two levels of
impairment tests are carried out, i.e., bottom-up test and
top-down test.

AS 2 does not require for separation of finance element for


inventories purchase on deferred settlement terms.

Ind AS 36 requires that an entity should estimate the


following assets for impairment at least annually even if
there is no indicator of impairment. This impairment test
may be performed at any time during an annual period,
provided it is performed at the same time every year.

Under Indian GAAP, an entity needs to test the following


assets for impairment at least at each financial year end
even if there is no indication that the asset is impaired.
AS 28 does not require annual impairment testing for the
goodwill unless there is an indication of impairment.

AS 2 applies to commodity broker-traders. Hence, they need


to measure inventories at lower of cost and net realizable
value under current Indian GAAP

Ind AS 36 Impairment of Assets is applicable to


investments in subsidiaries, associates and joint ventures
in the separate financial statements of the parent. In
accordance with Ind AS 28, interests in joint ventures and
associates included in the CFS by way of the equity method
are also within the scope of Ind AS 36.

Ind AS 36 does not permit an impairment loss recognized


for goodwill to be reversed in a subsequent period.

Guide to First-time Adoption of Ind AS |

31

AS 28 requires that impairment loss recognized for goodwill


should be reversed in a subsequent period when it was
caused by a specific external event of an exceptional nature
that is not expected to recur and subsequent external
events have occurred that reverse the effect of that event.

Ind AS 36 requires additional disclosures for one CGU


or group of CGUs, if the carrying amount of goodwill or
intangible assets with indefinite useful lives allocated to the
CGU or group of CGUs is significant in comparison with the
entitys total goodwill or intangible assets with indefinite
lives. The disclosure required primarily deal with the key
assumptions used to measure the recoverable amounts
of such CGU or groups of CGUs. Disclosures required
also include headroom and impact of reasonably possible
changes in key assumptions.
AS 28 does not require any such disclosure.

Key impact
Component accounting
Under Ind AS 16, a component of an item of PPE with a cost
that is significant in relation to total cost of the item will be
separately depreciated. Hence, entities will need to divide
the cost of an asset into significant parts, if their useful life
is different, and depreciate them separately. This will require
entities to restructure their fixed asset register and recompute
depreciation. Furthermore, the requirement of estimating
residual value is likely to change depreciation of many assets,
as Indian companies normally presume 5% of the value of assets
as their residual value, rather than making any estimate of the
residual value. It may be noted that component accounting is a
requirement under the Act also from financial years beginning
on or after 1 April 2015, and even companies that continue
to follow Indian GAAP will have to carry out component
accounting.

32 | Guide to First-time Adoption of Ind AS

Revaluation of fixed assets


Indian entities, which have selectively revalued fixed assets
or intend to revalue the fixed assets, will have to determine
whether they want to continue with the revaluation model or
not. This decision is crucial for an entity if it wants to continue
with the revaluation model. It will have to:

Adopt the revaluation model for the entire class of assets


that cannot be restricted to some selective location
Update such revaluation on regular basis
Take a depreciation charge in the statement of profit and
loss based on revalued amounts to be updated regularly.

Intangible assets
Unlike Indian GAAP, amortization will not be required under
Ind AS for an intangible asset for which there is no foreseeable
limit on the period over which the asset is expected to generate
net cash inflow for the entity. However, annual impairment
testing will be required for such an asset. This can create
volatility in profit or loss. Moreover, the company will be able
to reflect intangible assets at their fair value, provided there is
an active market for them. This will help the company project
real value of their intangible assets in the balance sheet to their
stakeholders.

Provisions,
Contingent
Liabilities and
Contingent Assets
Key differences

Ind AS 37 specifically requires provision to be


created for constructive obligations if other
criteria for recognition of provision are also met. A
constructive obligation is an obligation that derives
from an entitys actions where:

By an established pattern of past practice,


published policies or a sufficiently specific
current statement, the entity has indicated
to other parties that it will accept certain
responsibilities, and
As a result, the entity has created a valid
expectation on the part of those other parties
that it will discharge those responsibilities.

AS 29 does not specifically recognize the concept


of constructive obligations. However, it requires
creation of provisions arising out of normal business
practices, custom and a desire to maintain good
business relations or to act in an equitable manner

AS 29 prohibits discounting the amounts of


provisions.

Ind AS 37 Provisions, Contingent Liabilities and


Contingent Assets does not apply to all financial
instruments (including financial guarantees) that
are within the scope of Ind AS 109 Financial
Instruments.
AS 29 Provisions, Contingent Liabilities and
Contingent Assets excludes from its scope only
those financial instruments, which are carried at fair
value. Therefore, it applies to financial instruments
(including financial guarantees) that are not carried
at fair value.

recognized as borrowing cost.

Ind AS 37 requires that where the effect of time


value of money is material, the amount of provision
should be the present value of the expenditures
expected to be required to settle the obligation. Ind
AS 37 also provides that where discounting is used,
the carrying amount of a provision increases in each
period to reflect the passage of time. This increase is

Under Ind AS 37, restructuring provision is made


based on constructive obligation. In contrast, AS 29
requires restructuring provision to be made based on
legal obligation.
Ind AS 37 requires disclosure of contingent assets in
the financial statements when the inflow of economic
benefits is probable. The disclosure, however, should
avoid misleading indications of the likelihood of
income arising.
AS 29 prohibits disclosure of contingent asset in the
financial statements. However, it can be disclosed
in the Directors Report, where inflow of economic
benefits is probable.

Leases
Key differences

Ind AS 17 Leases deals with lease of land and


composite leases. It requires a lease of land to
be assessed as an operating or finance lease,
based on the same criteria that are applicable
for lease of other assets. Ind AS 17 also states
that when a lease includes both land and building
elements, an entity assesses the classification
of each element as finance or an operating lease
separately in accordance with the criteria laid in the
standard. In determining whether the land element
is an operating or a finance lease, an important
consideration is that land normally has an indefinite
economic life.
AS 19 excludes lease of land from its scope.
Consequent to this, disparate practices have
emerged with regard to accounting for short-term
and long-term leases of land as well as composite
leases of land and building. An opinion issued by the
EAC provides guidance on long-term lease of land.
In accordance with the opinion, a lease of land for
very long period has the effect of passing significant
rights of ownership. Therefore, such a lease will be in
the nature of sale and should be accounted
for accordingly.

Guide to First-time Adoption of Ind AS |

33

Under Ind AS 17, lease rentals under an operating


lease are recognized as an expense/income on a
straight-line basis over the lease term unless:

Another systematic basis is more representative


of the time pattern of the users benefit even if
the payments to the lessors are not on that basis
Lease rentals are structured to increase in line
with expected general inflation to compensate
for the lessors expected inflationary cost
increases. If payments to the lessor vary because
of factors other than general inflation, then this
condition is not met.

Hence, Ind AS 17 does not mandate straight-lining of


lease escalation if they are in line with the expected
general inflation compensating the lessor for
expected inflationary cost.
Under AS 19, lease rentals under an operating lease are
recognized as an expense/income on a straight-line basis
over the lease term unless another systematic basis is more
representative of the time pattern of the users benefit even
if the payments to the lessors are not on that basis. This
view is further reiterated in certain EAC opinions.

If a sale and leaseback transaction results in a finance


lease, Ind AS 17 requires that any excess of sale proceeds
over the carrying amount is not immediately recognized
as income by a seller-lessee. Instead, it is deferred and
amortized over the lease term. However, it does not
prescribe any particular method of amortization.
AS 19 requires both excess and deficiency to be deferred
and amortized. AS 19 requires such excess/deficiency
to be amortized over the lease term in proportion to the
depreciation on the leased asset.

Determining whether an arrangement contains a lease


Many companies enter into arrangements for sale, purchase
or other service arrangements that do not take the legal form
of lease; but nevertheless they convey a right to use an asset
such as an item of property, plant or equipment for an agreed
period of time in return for a payment or series of payments.
AS 17 under current Indian GAAP does not contain any
specific guidance requiring identification of leases contained
in a transaction structured as sale, purchase or rendering of
service. In the absence of such guidance, entities typically do
not identify leases contained in such arrangements; rather,
such transactions are generally accounted based on their
legal form.

34 | Guide to First-time Adoption of Ind AS

The application of Ind AS will require entities to carefully


examine the terms of an arrangement to determine whether it
is, or contains, a lease. Appendix C to Ind AS 17 provides the
following two criteria, which if met, will indicate the existence of
a lease:
a) Fulfilment of the arrangement is dependent on the use of a
specific asset or assets (the asset), and
b) The arrangement conveys a right to use the asset
These two criteria are not straight forward and require a careful
analysis in each case.

Dependence on the use of a specific asset


An arrangement may contain a lease when the contract
explicitly requires a specific asset to be used. The arrangement
may also contain a lease when no asset is specified but it is
not economically feasible or practicable for the supplier to
use an alternative asset, for example when the asset has
been developed specifically to meet the purchasers needs
or when the supplier owns only one suitable asset. On the
other hand, when a specific asset is explicitly identified by the
arrangement, but the seller has the right and the ability to
provide the relevant goods using other assets not specified in
the agreement, the arrangement will not contain a lease.

Conveys a right to use the asset


Once a specific asset is identified, there must then be an
assessment as to whether there is a right of use, which is
essentially a right to control the use of the underlying asset.
Appendix C to Ind AS 17 refers to three conditions that can
indicate such a right of use exists, of which only one needs to be
met. These three conditions are:
a) The purchaser has the ability or right to operate the
asset or direct others to operate the asset in a manner it
determines while obtaining or controlling more than an
insignificant amount of the output or other utility of the
asset.
b) The purchaser has the ability or right to control physical
access to the underlying asset while obtaining or
controlling more than an insignificant amount of the
output or other utility of the asset.

c) Facts and circumstances indicate that it is remote that one


or more parties other than the purchaser will take more
than an insignificant amount of the output or other utility
that will be produced or generated by the asset during the
term of the arrangement. Furthermore, the price that the
purchaser will pay for the output is neither contractually
fixed per unit of output nor equal to the current market
price per unit of output as of the time of delivery of the
output.

Key impact

The effects of changes


in foreign exchange
rates
Key differences

Service contracts
Under Ind AS, an embedded lease may exist in sale/purchase/
service contracts entered by entities in any industry. Given
below are some contracts that are most susceptible to a lease
classification:

Outsourcing arrangements, e.g., the outsourcing of an


entitys data processing, storage or other functions such as
manufacturing

AS 11 The Effects of Changes in Foreign Exchange Rates


is based on the concept of reporting currency. It defines
the term reporting currency as the currency used in
presenting the financial statements. AS 11 does not
specify the currency in which an entity should present its
financial statements. However, an entity normally uses the
currency of the country in which it is domiciled. If an entity
uses a different currency, it needs to disclose the reason
for using that currency. Considering the requirements of
the Companies Act, 1956 (including its Schedule VI) and
the Companies Act, 2013 (including its Schedule III), Indian
companies typically use INR as their reporting currency.

Exclusive sale/purchase/supply contracts


Suppliers of network capacity that provide purchasers with
rights to capacity, e.g., in the telecommunications industry
Power purchase agreement or other take-or-pay contracts
requiring the purchaser to make specified payments
regardless of whether it takes delivery of the contracted
products or services
Transportation contracts involving the provision of specific
vehicles

If an entity determines that an arrangement is, or contains, a


lease, the subsequent accounting for the lease element will be
covered under Ind AS 17. For example, an entity determines
whether a lease is an operating lease or a finance lease based
on Ind AS 17 criteria.
If leases are identified as finance lease, the entity will
derecognize the asset completely and recognize lease
payments receivable. The asset and finance lease liability is
recognized by the customer.
Apart from the impact on financial statements, such accounting
may also have significant business implications for both the
lessor and lessee, for example, compliance with debt covenants,
measurement of EBITDA, presentation of revenue and cost
numbers and ability to raise further finance.

Ind AS 21 The Effects of Changes in Foreign Exchange


Rates is based on the concept of functional currency.
It defines the functional currency as the currency of
the primary economic environment in which an entity
operates. It lays down specific criteria to determine the
functional currency of an entity. In accordance with Ind
AS 21, each individual entity determines its functional
currency and measures its results, and financial position
in that currency. Based on prescribed criteria, it is possible
that certain Indian entities may identify currencies other
than INR as their functional currency.

Ind AS 21 does not make distinction between integral


and non-integral foreign operations. All entities are
required to prepare their financial statements in their
functional currency. Any exchange gain/loss to recognize
a transaction in its functional currency is recognized in
the profit or loss for the period. In translating the financial
statements from functional currency to presentation
currency, a reporting entity should use the following
procedures:

Assets and liabilities, both monetary and nonmonetary, should be translated at the closing rate.
Income and expense items should be translated at
exchange rates at the dates of the transactions.
All resulting exchange differences should be
recognized in OCI and accumulated in the foreign
currency translation reserve, until the disposal of the
net investment
Guide to First-time Adoption of Ind AS |

35

AS 11 distinguishes between integral and non-integral


foreign operations and accordingly prescribes separate
accounting treatment for integral and non-integral
operations. The financial statements of an integral foreign
operation should be translated using the principles and
procedures as if the transactions of the foreign operation
had been those of the reporting entity itself. In translating
the financial statements of a non-integral foreign operation,
the reporting entity follows translation procedures which
are similar to translation into presentation currency under
Ind AS 21.

AS 11 gives two options with regard to accounting for


exchange differences. The first option is that an entity
recognizes exchange differences as income or expense in
profit or loss for the period in which they arise. However,
AS 11 also provides companies an option to adopt the
following accounting treatment for exchange differences
arising on long-term foreign currency monetary items. The
option once selected is irrevocable and needs to be applied
to all long-term foreign currency monetary items. A longterm foreign currency monetary item is an item having a
term of 12 months or more at the date of its origination.

If the long-term foreign currency monetary item


relates to acquisition of a depreciable capital asset,
exchange differences arising on such monetary items
are added to or deducted from the cost of the asset
and are depreciated over the remaining useful life of
the asset.
If the long-term foreign currency monetary item
relates to other than acquisition of a depreciable
capital asset, exchange differences are accumulated
in the Foreign Currency Monetary Item Translation
Difference Account and amortized over the life of
such long-term asset or liability.
Exchange differences arising on short-term foreign
currency monetary items are recognized immediately
as income or expense in profit or loss for the period.

Ind AS 21 requires exchange differences arising on


translation/settlement of all foreign monetary items,
including long-term foreign currency monetary items, to
be recognized as income or expense in profit or loss in for
the period in which they arise. It does not give the option to
defer/capitalize exchange differences arising on long-term
foreign currency monetary items.

36 | Guide to First-time Adoption of Ind AS

However, Ind AS 21 contains scope exclusion for companies


which have applied the second alternative to defer/
capitalize exchange differences under AS 11. In accordance
with the exclusion, these companies have an option to
continue applying their Indian GAAP policy for accounting
of exchange differences arising on translation of long-term
foreign currency monetary items recognized in the financial
statements for the period ending immediately before the
beginning of the first Ind AS financial reporting period.
However, this option is not allowed for any new long-term
foreign currency monetary item recognized after the
implementation of Ind AS. This aspect is further elaborated
under the head First-time adoption of Ind AS.

Key impact
Compliance with local laws
Ind AS recommends that the local statutory and tax
requirements should not be considered when determining the
functional currency. If an Indian company concludes that INR is
not its functional currency, it may need to use a dual currency
ledger to capture financial information in both the local
currency and the functional currency to comply with both local
tax and other laws, as well as Ind AS requirements.

First-time adoption
Ind AS 101 does not contain an exemption allowing a first-time
adopter to use a currency other than the functional currency
in determining the cost of assets and liabilities. Consequently,
a first-time adopter that measured transactions in a currency
that is not its functional currency will need to restate its
financial statements with retrospective effect. For a large entity
with numerous assets, this may be an onerous exercise as it
will affect the measurement of all non-monetary items in the
opening Ind AS balance sheet.

Presentation of
financial statements
Key differences

Ind AS 1 Presentation of Financial Statements is


significantly different from the corresponding AS 1
Disclosure of Accounting Policies. While Ind AS sets out
overall requirements for the presentation of financial
statements, guidelines for their structure and minimum
requirements for their content, AS 1 deals only with
disclosure of accounting policies. It does not prescribe
any overall requirements for presentation of financial
statements. The format and disclosure requirements are
set out under Schedule III to the Companies Act, 2013.

There are no such disclosures required under current Indian


GAAP.

Ind AS introduces the concept of comprehensive income,


which requires all changes in equity (other than those
attributable to transactions with owners) to be presented
as part of the statement of profit and loss as a separate
component titled Other comprehensive income.
Under Indian GAAP, there is no concept of comprehensive
income. AS 5 requires all items of income and expenses to
be recognized in the statement of profit and loss, unless
required otherwise by any other accounting standard.

Ind AS 1 requires presentation of all transactions with


equity holders in their capacity as equity-holders in the
statement of changes in equity (SOCIE). The SOCIE is
considered to be an integral part of financial statements.
The concept of a SOCIE is not present under Indian GAAP;
however, information relating to appropriation of profits,
movement in capital and reserves, etc., is presented in the
notes to financial statements.

Among other disclosures, Ind AS 1 requires disclosure of:


Ind AS 1 prohibits any item to be presented as an


extraordinary item, either on the face of the income
statement or in the notes.
AS 5 Net Profit or Loss for the Period, Prior Period
Items and Changes in Accounting Policies, in Indian
GAAP, specifically requires disclosure of certain items as
extraordinary items.

The Ministry of Corporate Affairs (MCA) has still not


prescribed Ind AS compliant Schedule III. The ICAI had
issued an exposure draft of the Ind-AS compliant Schedule
III for companies other than NBFCs, for public comments.
However, it is still not final.

Information that enables users of its financial


statements to evaluate the entitys objectives, policies
and processes for managing capital

Ind AS 1 requires a third balance sheet as at the beginning


of the earliest comparative period, where an entity
applies an accounting policy retrospectively or makes
a retrospective restatement of items in its financial
statements, or when it reclassifies items in its financial
statements, to be included in a complete set of financial
statements.
AS 5 requires the impact of material changes in accounting
policies to be shown in financial statements for current
period. There is no requirement to present an additional
balance sheet.

Under Ind AS 1, an entity whose financial statements


comply with Ind AS is required to make an explicit and
unreserved statement of such compliance in the notes.
Such requirement is not there in current Indian GAAP.

Ind AS 1 acknowledges that in rare circumstances,


compliance with a requirement in an Ind AS may be so
misleading that it will conflict with the objective of financial
statements set out in the Framework. In such cases, the
entity should depart from that requirement if the relevant
regulatory framework requires, or otherwise does not
prohibit, such a departure. Ind AS 1 also prescribes
detailed disclosures to explain departure and its impact.
The current Indian GAAP does not recognize true and
fair override, and compliance with all notified accounting
standards is mandatory.

Critical judgments made by management in applying


accounting policies
Key sources of estimation uncertainty that have a
significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the
next financial year

Guide to First-time Adoption of Ind AS |

37

Ind AS 8 Accounting Policies, Changes in Accounting


Estimates and Errors recognizes that there will be
circumstances where a particular event, transaction or
other condition is not specifically addressed by Ind AS.
When this is the case, Ind AS 8 sets out a hierarchy of
guidance to be considered in the selection of an accounting
policy. The primary requirement is that management
should use its judgment in developing and applying an
accounting policy that results in information that is (i)
relevant to the economic decision-making needs of users,
and (ii) reliable.

Under AS 5, a prior period item includes only the items


of income and expense arising in the current period
from errors or omissions in the earlier period financial
statements. Therefore, balance sheet misclassifications not
impacting the statement of profit and loss are not treated
as prior period item under AS 5.

Indian GAAP does not contain any specific guidance on how


an entity will select accounting policy if a particular event,
transaction or other condition is not specifically addressed
by an accounting standard.

Ind AS 8 requires that when an entity changes an


accounting policy voluntarily, then it will apply the change
retrospectively. In other words, the entity will apply revised
accounting policy to transactions, other events and
conditions as if the revised policy had always been applied.
The standard requires the entity to adjust the opening
balance of each affected component of equity for the
earliest prior period presented and the other comparative
amounts disclosed for each prior period presented.
AS 5 under Indian GAAP does not provide any specific
guidance on whether the change needs to be applied
prospectively or retrospectively and how its impact should
be dealt with, except that AS 6 Depreciation Accounting
requires change in method of depreciation to be applied
retrospectively. In the absence of specific guidance,
differing practices are being followed with regard to
application of voluntary change in accounting policy.

Ind AS 8 requires that when an entity has not applied a


new Ind AS, which has been issued but is not yet effective,
the entity should disclose:

This fact, and


Known or reasonably estimable information relevant
to assessing the possible impact that application
of the new Ind AS will have on the entitys financial
statements in the period of initial application.

Indian GAAP does not contain this requirement.


Ind AS 8 treats all omissions/misstatements in an entitys


earlier period financial statements, including balance sheet
misclassifications, as an error/prior period item.

38 | Guide to First-time Adoption of Ind AS

Ind AS 8 requires that an entity will correct prior


period errors retrospectively in the first set of financial
statements approved for issue after their discovery by
restating the comparative amounts for the prior period(s)
presented in which the error occurred. If the error occurred
before the earliest prior period presented, it will restate
the opening balances of assets, liabilities and equity for the
earliest prior period presented. Ind AS 8 does not require
restatement of prior periods only if such a restatement is
impracticable.
AS 5 requires the impact of prior period items to be
included in the current year statement of profit and loss,
with a separate disclosure. Comparative information of
earlier years is not restated.

Ind AS 8 provides considerable guidance to explain


what impracticable means. Applying a requirement is
impracticable when an entity cannot apply it after making
every reasonable effort to do so.
The current Indian GAAP does not define the term
impractical.

Ind AS includes numerous additional presentation and


disclosure requirements vis--vis those required under
Indian GAAP. Nearly each Ind-AS contain additional
disclosures as compared to those required under Indian
GAAP. For example, Ind AS 113 Fair Value Measurement
requires comprehensive disclosures for assets and
liabilities which are measured at fair value and also for
items which are not measured at fair value but otherwise
require fair value disclosures.
Ind AS 107 Financial Instruments: Disclosures requires
extensive disclosures about the risks arising from financial
instruments and how they are managed. To comply with
these requirements, both qualitative and quantitative
disclosures are required.
Ind AS 103 requires extensive disclosures for business
combinations.
Similar disclosures are not required under Indian GAAP

Key impacts
Consistency with the Companies Act
In the case of voluntary change in accounting policy, Ind
AS 8 requires that comparative amount appearing in the
current period financial statements should be restated. A
similar requirement also applies for correction of an error and
reclassification of previous period amounts. One may argue
that these requirements are not in sync with section 131(1) of
the Act dealing with voluntary revision of financial statements.
In accordance with the section, the directors of a company
may prepare revised financial statements only after obtaining
approval of the Tribunal.

Related party
disclosures
Key differences

Once Ind AS becomes applicable, an issue will arise whether


restatement of comparative amounts appearing in the current
period financial statements tantamounts to revision of financial
statements. If so, the companies will need to obtain the Tribunal
approval for applying each change in policy, reclassification and
correction of error. This will be very time consuming exercise.
To address this aspect, the MCA may clarify that if a company
restates comparative amount appearing in the current period
financial statements to comply Ind AS, this will not be treated
as re-opening/revision of previous year financial statements
under section 131(1).

Enhanced transparency and accountability


Disclosures required by Ind AS will significantly increase
transparency and accountability of the financial statements.
For example, Ind AS 1 requires disclosure of critical judgments
made by management in applying accounting policies and
key sources of estimation uncertainty that have a significant
risk of causing a material adjustment to the carrying amounts
of assets and liabilities within the next financial year. This is
likely to not only bring improved transparency in financial
statements, but it is also expected to put additional onus on
entities to ensure that estimates and judgments made are
justifiable, since, they are publicly accountable for them.

When an entity assesses whether two parties are


related, it would treat significant influence as
equivalent to the relationship that exists between
an entity and a member of its key management
personnel. However, those relationships are not as
close as a relationship of control or joint control.
If two entities are both subject to control (or joint
control) by the same entity or person, the two entities
are related to each other.
If one entity (or person) controls (or jointly controls)
a second entity and the first entity (or person) has
significant influence over a third entity, the second
and third entities are related to each other.
Conversely, if two entities are both subject to
significant influence by the same entity (or person),
the two entities are not related to each other.
If, based on Ind AS 24 definition, one party is
identified as related to the second party; the definition
would treat the second party as related to the first
party, by symmetry.

There are no such clear principles for identification of


related parties under AS 18. Particularly, AS 18 definition
is not based on the principle of reciprocity.

Identification and fulfilment of data gaps


The application of Ind AS will give rise to significant additional
disclosures in the financial statements. The reviews of the
2005 financial statements of European companies suggested
that financial disclosures under IFRS increased by more than
30%, as compared with their previous disclosures. To comply
with additional disclosure requirements, management should
identify data gaps early on so that any information that needs
to be captured can be captured and recorded for all periods
required to be converted.

Definition of related party under Ind AS 24 is broader


and will cover increased number of related party
relationship than AS 18. Ind AS 24 uses the following
broad approach to identify related parties:

Ind AS 24 includes close members of families of key


management personnel (KMP) as related party as well as
that of persons who exercise control/significant influence
over the entity.
AS 18 includes only relatives of KMPs as related party.

Under Ind AS 24, definition of KMP includes any director


whether executive or otherwise. AS 18 excludes nonexecutive directors from the definition of KMP.
According to Ind AS 24, an entity discloses that terms of
related party transactions are equivalent to those that
prevail in arms length transactions, only if such terms can
be substantiated.
Guide to First-time Adoption of Ind AS |

39

AS 18 has no such stipulation on substantiation of related


party transactions when the same is disclosed to be on
arms length basis.

Ind AS 24 requires disclosure of key management


personnels compensation in total and for specified
categories, such as short-term employee benefits and postemployment benefits.

Segment reporting
Key differences

AS 18 does not have such requirement.


Ind AS 24 defines the term government-related entity


as an entity that is controlled, jointly controlled or
significantly influenced by a government. Ind AS 24
exempts a reporting entity from making disclosures
pertaining to related party transactions and outstanding
balances, including commitments, with:

A government that has control or joint control of, or


significant influence over, the reporting entity, and
Another entity that is a related party because the
same government has control or joint control of, or
significant influence over, both the reporting entity
and the other entity

If a reporting entity applies the above exemption, it should


still make certain specified disclosures about transactions
and related outstanding balances.
In accordance with AS 18, a state-controlled entity is an
entity, which is under the control of the Central Government
and/or any state government(s). AS 18 does not require
disclosure in the financial statements of state-controlled
entities as regards to related party relationships with other
state-controlled entities and transactions with such entities.

Key impact
Entities will be required to reassess the list of related parties for
enhanced relationships, which is covered under the scope of
definition of related party in Ind AS 24.
It is noted that in the revised Clause 49, definition of the term
related party includes related parties according to applicable
accounting standards. Hence, on the application of Ind AS, the
approval requirements under the SEBI Clause 49 for related
party transactions will also get triggered for transactions with
related parties within the scope of Ind AS 24.
Entities will need to strengthen/change their reporting
processes and information technology systems to map new
related parties covered in Ind AS 24 and track transactions with
specific related parties.

40 | Guide to First-time Adoption of Ind AS

Ind AS 108 Operating Segments adopts management


reporting approach to identify operating segments. It
is likely that in many cases, the structure of operating
segments will be the same under Ind AS 108 as under AS
17 Segment Reporting. This is because AS 17, like Ind AS
108, considers reporting segments as the organizational
units for which information is reported to key management
personnel for the purpose of performance assessment
and future resource allocation. When an entitys internal
structure and management reporting system is based
on either product lines or geography, AS 17 requires the
entity to choose one as its primary segment reporting
format. Ind AS 108, however, does not impose this
requirement to report segment information on a product
or geographical basis and in some cases this may result in
different segments being reported under Ind AS 108 as
compared with AS 17.
An entity is first required to identify all operating segments
that meet the definition in Ind AS 108. Once all operating
segments have been identified, the entity must determine
which of these operating segments are reportable. If
a segment is reportable, then, it must be separately
disclosed. This approach is the same as that required by AS
17, except that it does not require the entity to determine
a primary and secondary basis of segment reporting.
Ind AS 108 requires that the amount of each segment item
reported is the measure reported to the Chief Operating
Decision Maker (CODM) in internal management reports,
even if this information is not prepared in accordance with
the Ind AS accounting policies of the entity. This may result
in differences between the amounts reported in segment
information and those reported in the entitys primary
financial statements. In contrast, AS 17 requires segment
information to be prepared in conformity with the entitys
accounting policies for preparing its financial statements.
Unlike AS 17, Ind AS 108 does not define terms such as
segment revenue, segment profit or loss, segment assets
and segment liabilities. As a result, diversity of reporting
practices will increase.
Since Ind AS 108 does not define segments as either
business or geographical segments and does not require
measurement of segment amounts based on an entitys
Ind AS accounting policies, an entity must disclose how

it determined its reportable operating segments, along


with the basis on which disclosed amounts have been
measured. These disclosures include reconciliations of the
total key segment amounts to the corresponding entity
amounts reported in Ind AS financial statements.

A measure of profit or loss and assets for each segment


must be disclosed. Additional line items, such as interest
revenue and interest expense, are required to be disclosed
if they are provided to the CODM (or included in the
measure of segment profit or loss reviewed by the CODM).
AS 17, in contrast, specifies the items that must be
disclosed for each reportable segment.
Under Ind AS, disclosures are required when an entity
receives more than 10% of its revenue from a single
customer. In such instances, an entity must disclose this
fact, the total amount of revenue earned from each such
customer and the name of the operating segment that
reports the revenue. Disclosure is not required of the
name of each major customer, nor the amounts of revenue
reported in each segment for that customer.
Similar disclosures are not required under AS 17.

Key impact
Identification of CODM
Reporting under Ind AS 108 is based on information furnished
to the CODM. The term CODM defines a function rather than an
individual with a specific title. The function of the CODM is to
allocate resources and assess operating results of the segments
of an entity. The CODM could either be an individual, such as
the chief executive officer, the chief operating officer, a group
of executives such as the board of directors or a management
committee. Entities should review their management structure
to identify the CODM.

Goodwill impairment
Ind AS 36 requires goodwill to be allocated to each CGU or
to groups of CGUs. The relevant CGU or group of CGUs must
represent the lowest level within the entity at which the
goodwill is monitored for internal management purposes,
and may not be larger than an operating segment. If different
segments are reported under Ind AS 108, than were reported
under AS 17, it follows that there will be differences between
the CGUs that make up an Ind AS 108 segment and those that
made up an AS 17 segment. As a result, the CGUs supporting
goodwill may no longer be in the same segment under Ind
AS 108 as under AS 17. It may, therefore, be necessary to
reallocate goodwill associated with CGUs that are affected by
the change from AS 17 to Ind AS 108. It is possible that this
reallocation of goodwill could expose CGUs for which the
carrying amount, including the allocated goodwill, exceeds the
recoverable amount, thereby, giving rise to an impairment loss.

Customer concentration
On adoption of Ind AS, entities will be required to furnish
a disclosure of customer concentration, which will enable
investors to assess risk faced by a company. The company will
have to compile information of revenue generated by each
customer to furnish disclosures required by Ind AS 108.

Reconciliation of management information system with


financial statement
Ind AS 108 requires segment reporting to be made based on
information furnished to CODM. If the policies followed for
computing information for management information system
does not match with those used in financial statements, an
entity will need to furnish reconciliation. Hence, entities need
to devise or upgrade systems to prepare reconciliation between
the MIS and the accounting system.

Change in segment reporting approach


On adoption of Ind AS 108, the identification of an entitys
segments may change from the position under AS 17. Ind
AS 108 requires operating segments to be identified on the
basis of internal reports on components of the entity that
are regularly reviewed by the CODM, in order to allocate
resources to the segment, and to assess its performance.
AS 17 requires an entity to identify two sets of segments,
business and geographical, using a risk-and-reward-approach,
with the entitys system of internal financial reporting to key
management personnel serving only as the starting point for
the identification of such segments.

Guide to First-time Adoption of Ind AS |

41

First-time adoption
of Ind AS

First-time adoption
challenges and
perspective
Although, entities regularly adopt new accounting standards
under Indian GAAP, adopting Ind AS which is an entirely
different basis of accounting poses a distinct set of problems.

The sheer magnitude of efforts involved in adopting a large


number of new accounting standards,
The requirements of individual Ind AS differ significantly
from those under Indian GAAP, and
Large amount of information that now needs to be
collected for recognition, measurement and disclosure
purposes that was not previously required under
Indian GAAP.

In principle, a first-time adopter should prepare its Ind AS


financial statements as if it had always applied Ind AS. However,
this may not be possible to achieve in many cases. Ind AS 101
First-time Adoption of Indian Accounting Standards provides
certain solutions in overcoming practical difficulties in applying

42 | Guide to First-time Adoption of Ind AS

Ind AS for the first time. Ind AS 101 provides the basis on
which an entity will convert its previous financial statements to
Ind AS. It prescribes ground rules and accounting policies to be
followed in an entitys first set of Ind AS financial statements,
and in preparation of its opening Ind AS balance sheet. The
opening Ind AS balance sheet serves as the starting point for
the future accounting under Ind AS.
Though Ind AS 101 goes some way to reduce the burden of
historical accounting information, it does not turn the transition
process into a hassle free job. Even under Ind AS 101, the
transition process may remain complex and time consuming for
many entities. It places demands on entities in areas such as
staff training, data collection, analysis of contracts and other
critical agreements, and new or modified information system
requirements.
There are several important decisions which need to be made
as part of Ind AS conversion. These decisions will affect the
amount of work required on Ind AS adoption as well as financial
results/financial position of a company both at the time of
conversion as well as in the post-conversion period. While there
are no right or wrong answers to the multitude of questions
which need to be addressed on the first-time adoption, it is
imperative that senior personnel of first-time adopters spend
the time necessary to understand which combination of
answers will yield the best result for their entity. Key choices to
be made include:

Ind AS elections at date of transition: Ind AS 101 contains


a number of voluntary exemptions that represent
unique choices for a first-time adopter. Entities must
evaluate which exemptions are relevant and which
options offered within the exemptions lead to the best
outcome for the entity. For example, if an entity elects the
exemption to apply Ind AS 103 Business Combinations
prospectively, there are clearly significantly less efforts
involved because the entity will not be required to get
retrospective fair valuation done for identifiable assets
acquired and liabilities assumed and can largely continue
with accounting done under the previous GAAP. However,
consider that an entity has made a substantial business
combination in the recent past years which resulted in
considerable goodwill because it was required to recognize
assets and liabilities acquired at book value under the
Indian GAAP. In this case, retrospective application of
Ind AS 103 will give the entity an opportunity to present
true worth of the acquisition and reduce the amount of
goodwill. Retaining goodwill at a substantial amount can
cause huge P&L volatility because of impairment.
Selection of accounting policies: Under Ind AS, it is
necessary to make certain accounting policy choices, and
the choices made can have a significant impact on an
entitys financial results and the processes that support
financial reporting. For example, is it more appropriate to
recognize property, plant and equipment at cost or at fair
value? If fair value is considered to be the better choice,
how will the entity go about obtaining appropriate fair
value information?

There is no one size fits all answer to these questions. Time


and careful consideration are required to achieve an optimal
end result.

Overview of
Ind AS 101
Ind AS 101 is applicable to the first set of annual Ind AS
financial statements prepared by an entity and to each interim
financial report, if any, that it presents in accordance with
Ind AS 34 Interim Financial Reporting, for part of the period
covered by its first Ind AS financial statements.
The objective of Ind AS 101 is to ensure that an entitys first
Ind AS financial statements, and its interim financial reports
for part of the period covered by those financial statements,
contain high quality information that:
a) Is transparent for users and comparable over all periods
presented,
b) Provides a suitable starting point for accounting under Ind
AS, and
c) Can be generated at a cost that does not exceed benefits
to users.
Ind AS 101 prescribes the procedures that an entity is required
to follow while adopting Ind AS for the first time. The underlying
principle is that a first-time adopter should prepare financial
statements as if it had always applied Ind AS. However, it
establishes two types of departure from the principle of full
retrospective application of Ind AS:

It prohibits retrospective application of some aspects of


other standards (mandatory exceptions), and
It grants a number of exemptions from some of the
requirements of other standards (voluntary exemptions).

Guide to First-time Adoption of Ind AS |

43

Ind AS 101 is very much a rule-based standard, which can lead


to different answers in similar situations and sometimes to
counter-intuitive answers. To illustrate, in the case of compound
financial instruments, Ind AS 101 requires retrospective
application of Ind AS principles to determine the fair value of
financial liability component at the time of initial recognition.
This fair value is used to identify equity component and
subsequent accounting for the liability component. A voluntary
exemption is available only if the financial liability component
is no longer outstanding at the date of transition to Ind AS.
In contrast, Ind AS 101 contains a mandatory exception
for interest free/concessional loan from the government. A
first-time adopter is generally not allowed to apply Ind AS
requirement retrospectively to determine the fair value of
loan at the date of initial recognition. Rather, previous GAAP
carrying amount at the transition date is used as Ind AS
carrying amount at the transition date.
In principle, determination of the fair value of financial liability
component of compound financial instrument or that of
government loan at the date of initial recognition involves
similar principles. In both the cases, future cash flows need
to be discounted at the market rate of interest. However,
determining fair valuation of loan is required in the case of
compound financial instrument, but prohibited in the case of
interest free or concessional loan from the government. Ind AS
101 is clear that exemptions given and exceptions provided are
applicable only to the specific items and cannot be applied by
analogy to any other item.

Who is first-time
adopter?
Ind AS 101 defines the first Ind AS financial statements as
the first annual financial statements in which an entity adopts
Ind AS by an explicit and unreserved statement of compliance
with Ind AS notified under the Companies Act, 2013. The
decisive factor is whether or not the entity made that explicit
and unreserved statement of compliance with Ind AS.
Two interpretative issues that arise as a result of this
requirement are discussed below.
An entity complies with all Ind AS but does not make
an unreserved statement of compliance with Ind
AS. Will those statements be treated as first Ind AS
financial statements?
No, those financial statements will not be treated as
first Ind AS financial statements. This scenario may
lead to potential legal implications for companies
as compliance with Ind AS is mandatory for all
companies under the roadmap.
The entity does not comply with Ind AS but makes
an unreserved statement of compliance with Ind AS
(could be recognition, measurement or disclosure).
The auditors have qualified the financial statements
as not complying with Ind AS. Will those statements
be treated as first Ind AS financial statements?
Yes, these financial statements will be treated as first
Ind AS financial statements. In subsequent years, the
entity can make the appropriate changes by applying
Ind AS 8 Accounting Policies, Changes in Accounting
Estimates and Errors to correct the errors.

An entity that presents its first Ind AS financial statements is


a first-time adopter, and should apply Ind AS 101 in preparing
those financial statements. It should also apply Ind AS 101 in
each interim financial report that it presents in accordance with
Ind AS 34 Interim Financial Reporting for a part of the period
covered by its first Ind AS financial statements.
The roadmap issued by the MCA is clear that once a company
opts to follow Ind AS either voluntarily or mandatorily, it cannot
discontinue the same. Hence, a company can be first-time
adopter of Ind AS and apply Ind AS 101 only once during its
life time.

44 | Guide to First-time Adoption of Ind AS

First-time adoption
timeline/key dates
Two terms are key to understand Ind AS 101:- reporting date
and transition date. The reporting date is the end of the latest
period covered by Ind AS financial statements or by an interim
financial report. The transition date is the beginning of the
earliest period for which an entity presents full comparative
information under Ind AS in its first Ind AS financial statements.

To illustrate, consider an Indian company with a March yearend has net worth greater than INR500 crores. The company
chooses not to use the early application choice and therefore
needs to apply Ind AS for the financial year beginning on or
after 1 April 2016. The companys first mandatory reporting
date under Ind AS will be 31 March 2017. In the financial
statements for the year ended 31 March 2017, it also needs
to present comparative Ind AS information for the year ended
31 March 2016. Consequently, its transition date to Ind AS
will be 1 April 2015. In other words, its first set of financial
statements will be for 1 April 2016 to 31 March 2017 with Ind
AS comparative information also provided for 1 April 2015 to
31 March 2016. The opening Ind AS balance sheet date will be
as of 1 April 2015.

Last financial
statements under
previous GAAP
Comparative
period

First Ind AS
reporting period

First Ind AS financial


statements

1/4/2014

1/4/2015

1/4/2016

31/03/2017

Date of transition to
Ind AS

Beginning of the first

Reporting date

Opening Ind AS
balance sheet

Ind AS reporting
period

Guide to First-time Adoption of Ind AS |

45

Consistent application
of accounting policies
Ind AS 101 requires an entity to prepare and present an
opening Ind AS balance sheet at its transition date, i.e., 1 April
2015 in the above example. The opening Ind AS balance sheet
is the starting point for subsequent accounting under Ind AS.
Ind AS 101 requires a first-time adopter to use the same
accounting policies in its opening Ind AS balance sheet and for
all periods presented in its first Ind AS financial statements.
To achieve this, the entity should comply with each Ind AS
effective at the end of its first Ind AS reporting period, after
taking into account voluntary exemptions and mandatory
exceptions to the retrospective application of Ind AS.
The requirement to apply same accounting policies to all
periods prohibits a first-time adopter from applying previous
versions of standards that were effective at earlier dates.
This not only enhances comparability, but also gives users
comparative information based on Ind AS that are superior to
superseded versions of those standards and avoids unnecessary
costs. For similar reasons, Ind AS 101 also permits an entity to
apply a new Ind AS that is not yet mandatory if that standard
allows early application. After the standard is selected, it is
applied consistently throughout the periods presented.

Example 1
Background
The reporting date for FTA Limiteds first Ind AS financial
statements will be 31 March 2017. Therefore, its date
of transition to Ind AS is 1 April 2015. FTA presents
financial statements under Indian GAAP annually to 31
March each year up to, and including, 31 March 2016.

Application of requirements
FTA will be required to apply the Ind AS effective for
periods ending on 31 March 2017 in:

Preparing and presenting its opening Ind AS balance


sheet as at 1 April 2015, and
Preparing and presenting its balance sheet for
31 March 2017 (including comparative amounts
for 31 March 2016), statement of profit and loss,
statement of changes in equity and cash flow
statement for the year ended 31 March 2017 and
disclosures (including comparative information for
the year ended 31 March 2016)

If a new Ind AS is not yet mandatory but permits early


application, FTA is permitted, but not required, to
apply that Ind AS in its first Ind AS financial statements
retroactive to 1 April 2015.

The fundamental principle of Ind AS 101 is to require full


retrospective application of the standards in force at an
entitys reporting date, with limited voluntary exemptions and
mandatory exceptions. The requirements of Ind AS 8 pertaining
to change in accounting policies do not apply in an entitys first
Ind AS financial statements. Therefore, Ind AS 8 applies to
entities subsequent financial statements.
If during the period covered by its first Ind AS financial
statements an entity changes its accounting policies or its use
of exemption contained in Ind AS, it will explain the changes
between its first Ind AS interim financial report and its first Ind
AS annual financial statements.

46 | Guide to First-time Adoption of Ind AS

Previous GAAP

obligation on the transition date, it needs to recognize the


provision in the opening Ind AS balance sheet. If there was
no legal obligation by that date, the Indian GAAP balance
sheet would not have recorded such provision.

For the application of exemptions and exceptions as well as


for disclosure of reconciliations required by Ind AS 101, the
previous GAAP of first-time adopter is extremely relevant. Ind
AS 101 defines previous GAAP as the basis of accounting
that a first-time adopter used for its statutory reporting
in India immediately before adopting Ind AS. For instance,
companies required to prepare their financial statements in
accordance with section 133 of the Companies Act, 2013, will
consider those financial statements as previous GAAP financial
statements.

Ind AS 12 is based on the balance sheet approach. In


contrast, AS 22 requires deferred taxes to be recognized
based on the income statement approach. Hence,
temporary differences, for which deferred tax is not
recognized under Indian GAAP, need to be identified and
recognized in the opening Ind AS balance sheet.
An entity may not have prepared CFS under Indian
GAAP or may not have consolidated a subsidiary which
was excluded under AS 21. The opening Ind AS balance
sheet needs to be drawn up to ensure all subsidiaries are
consolidated in the consolidated opening Ind AS balance
sheet.

In accordance with section 133 of the Companies Act, the


GAAP permitted for standalone and consolidated financial
statements is Indian GAAP. Even in the case of foreign
subsidiaries, associates and joint ventures of an Indian
company, for the purposes of preparing Ind AS CFS, the
previous GAAP will generally be Indian GAAP.

Transition from Indian


GAAP to Ind AS
In preparing the opening Ind AS balance sheet, subject to
voluntary exemptions and mandatory exceptions, an entity
should:

Not recognize items as assets or liabilities if Ind AS does


not permit such recognition
Assets and liabilities recognized under Indian GAAP,
which do not qualify for recognition under Ind AS, need
to be eliminated from the opening Ind AS balance sheet.
For example, proposed dividends cannot be disclosed as
liability in Ind AS and this liability should be eliminated
from the opening Ind AS balance sheet.

Recognize all assets and liabilities whose recognition is


required by Ind AS
Some examples are:
All derivative financial assets and liabilities and embedded
derivatives requiring separation need to be recognized
in the opening Ind AS balance sheet. If these are not
recorded under Indian GAAP, entities need to bring them
on the opening Ind AS balance sheet.
Ind AS requires restructuring provisions to be recognized
based on constructive obligation, while Indian GAAP
permits recognizing such provision only when legal
obligation arises. If a first-time adopter had constructive

Entities also need to gather information, which is required


to be disclosed in the Ind AS financial statements and
was not disclosed under Indian GAAP. For example, Indian
GAAP prohibits disclosure of contingent assets, whereas,
Ind AS requires such disclosure.

Reclassify assets, liabilities and items of equity according


to the requirements of Ind AS
Some common reclassifications are highlighted below:
Under Indian GAAP, liability and equity classification is
based on legal form, rather than economic substance. For
example, all redeemable preference shares are classified
as equity under Indian GAAP. Under Ind AS, liability vs.
equity classification will be based on economic substance
and definition of these terms. Consequently, a first-time
adopter needs to identify items which meet the definition
of equity and liability under Ind AS and reclassify them
accordingly in the opening Ind AS
balance sheet.
Ind AS 101 provides an exemption from split accounting
of compound financial instruments when certain
conditions are satisfied. When this exemption cannot be
availed, compound financial instruments need to be split
into equity and liability portions for their appropriate
classification.
There may be acquired intangible assets in the past
business combinations, which do not meet the definition
of intangible assets under Ind AS. These need to be
reclassified to goodwill.

Guide to First-time Adoption of Ind AS |

47

Measure all assets and liabilities in accordance with


Ind AS
All assets and liabilities need to be measured using Ind
AS principles. For example, an entity will need to measure
certain agricultural assets at fair value, which may not
have been the measurement basis under Indian GAAP.

Any change in accounting policies on adoption of Ind AS


may cause changes in the amounts previously recognized
in respect of events and transactions that occurred before
the date of transition. The effects of these changes should
be recognized at the date of transition to Ind AS in retained
earnings or, if appropriate, in another category of equity. For
example, an entity that applies the Ind AS 16 Property, Plant
and Equipment revaluation model in its first Ind AS financial
statements would recognize the difference between cost and
the revalued amount of property, plant and equipment in a
revaluation reserve. By contrast, an entity that had applied
a revaluation model under its previous GAAP, but decided
to apply the cost model under Ind AS 16, would reallocate
the revaluation reserve to retained earnings or a separate
component of equity not described as a revaluation reserve.
A first-time adopter is under no obligation to ensure that its Ind
AS accounting policies are similar to or as close as possible to
its previous GAAP accounting policies. Therefore, a first-time
adopter could adopt Ind AS 16 revaluation model despite the
fact that it applied a cost model under its previous GAAP or
vice versa. However, a first-time adopter would need to take
into account the guidance in Ind AS 8 to ensure that its choice
of accounting policy results in information that is relevant and
reliable.
The requirement to prepare the opening Ind AS balance sheet
and reset the clock at that date poses several challenges
for first-time adopters. Even a first-time adopter that already
applies a standard that is directly based on Ind AS may decide
to restate items in the opening Ind AS balance sheet. To
illustrate, consider that under Indian GAAP, an entity accounts
for its items of property, plant and equipment at cost less
depreciation. At the transition date, Indian GAAP carrying
value of PPE is the same as that would have been arrived at by
applying Ind AS 16 retrospectively. The entity may still decide
to use deemed cost exemption for some or all of its assets as
allowed by Ind AS 101.
As stated above, Ind AS 101 requires that effect of any
change in accounting policy should be recognized at the date
of transition to Ind AS in retained earnings. A company will
identify distributable portion of retained earnings in accordance
with the requirements of the Companies Act, 2013.

48 | Guide to First-time Adoption of Ind AS

Departures from
full retrospective
application
Ind AS 101 establishes two types of departure from the
principle of full retrospective application of standards in force at
the end of the first Ind AS reporting period.

Mandatory exceptions
Ind AS 101 prohibits retrospective application of Ind AS 101 in
some areas, particularly where this would require judgments
by management about past conditions after the outcome of
a particular transaction is already known. The mandatory
exceptions in the standard cover the following situations:

Estimates

Classification and measurement of financial assets

Impairment of financial assets

Derecognition of financial assets and financial liabilities

Embedded derivatives

Hedge accounting

Government loans

Non-controlling interests

Voluntary exemptions
In addition to mandatory exceptions, Ind AS 101 grants limited
voluntary exemptions from the general requirement of full
retrospective application of the standards in force at the end
of an entitys first Ind AS reporting period. These exemptions
relate to:

Business combination

Share-based payment transactions

Insurance contracts

Deemed cost

Leases

Cumulative translation differences

Investments in subsidiaries, joint ventures and associates

Compound financial instruments

Designation of previously recognized financial instruments

Fair value measurement of financial assets or financial


liabilities at initial recognition
Decommissioning liabilities included in the cost of property,
plant and equipment

Service concession arrangements

Extinguishing financial liabilities with equity instruments

Severe hyperinflation

Joint arrangements

Stripping costs in the production phase of a surface mine

Designation of contracts to buy or sell a non-financial item

Revenue from contracts with customers, and

Non-current assets held for sale and discontinued


operations

Application of these exemptions is entirely optional, i.e., a


first-time adopter can pick and choose the exemptions that it
wants to apply. It is important to note that Ind AS 101 does not
establish a hierarchy of exemptions. Therefore, when an item
is covered by more than one exemption, a first-time adopter
has a free choice in determining the order in which it applies
exemptions. It is, however, specifically prohibited to apply
these exemptions by analogy to other items. Moreover, in areas
where there is no voluntary exemption, the entity cannot avoid
applying Ind AS retrospectively on the argument that cost of
complying with them is likely to exceed the benefits to users of
financial statements.
For the purpose of this publication, we have divided exceptions
and exemptions into suitable headings, such as, non-financial
assets and liabilities, revenue, business combination and
related items, financial instruments and other miscellaneous
exemptions and exceptions.

Assets and liabilities of subsidiaries, associates and joint


ventures

Guide to First-time Adoption of Ind AS |

49

Non-financial assets
and liabilities
Deemed cost
Full retrospective application of Ind AS 16, Ind AS 38 and Ind
AS 40 to the items of property, plant and equipment (PPE),
intangible assets and investment property could be quite
onerous because:

a) Use of fair valuation or revaluation as deemed cost


Ind AS 101 permits a first-time adopter to measure
individual items of PPE at deemed cost at the date of
transition to Ind AS. Under this approach, the deemed cost
that a first-time adopter uses is either:
1. The fair value of the item at the transition date, or
2. A revaluation under the previous GAAP at, or before the
date of transition to Ind AS, if the revaluation was, at the
date of the revaluation, broadly comparable to:
(ii) Fair value, or

These items are long-lived which means that accounting


records for the period of acquisition may not be available
anymore.
The entity may have revalued items in the past as a matter
of accounting policy,
Even if the items were carried at depreciated cost, the
accounting policy for recognition, measurement and
depreciation may not have been Ind AS compliant.

Given the significance of items such as PPE in the balance


sheet of many first-time adopters and the sheer number of
transactions affecting PPE, restatement is not only difficult but
would often also involve huge cost and effort. Nevertheless, a
first-time adopter needs a starting point for those assets in its
opening Ind AS balance sheet. Therefore, Ind AS 101 includes
an exemption for deemed cost that may not be the true Ind
AS compliant cost basis of an asset, but that is deemed to be a
suitable starting point. When the exemption is applied, deemed
cost is the basis for subsequent depreciation and impairment
tests.
A full retrospective restatement according to Ind AS 16 is one
of the basis for measuring PPE on first time adoption. However,
to deal with practical issues in the retrospective restatement,
Ind AS 101 permits a first-time adopter to measure items of
PPE at deemed cost at the date of transition to Ind AS. If a
first time adopter uses deemed cost exemption, subsequent
depreciation/amortization of the asset is based on the deemed
cost and starts from the date for which the entity established
the deemed cost.

Fair value/revaluation as deemed cost

Event-driven fair value measurement as deemed cost

Previous GAAP carrying value as deemed cost

(iii) Cost or depreciated cost under Ind AS, adjusted to


reflect, for example, changes in a general or specific
price index.
The revaluations referred to in (2) above need only be broadly
comparable to fair value or reflect an index applied to a cost
that is broadly comparable to cost determined under Ind AS. It
appears that in the interest of practicality, Ind AS 101 allows
flexibility in this matter.
Ind AS 101 describes revaluations referred to in (2) above as
a previous GAAP revaluation. Therefore, in our view, such
revaluations can only be used as the basis for deemed cost if
they were recognized in the first-time adopters previous GAAP
financial statements. For example, a previous GAAP impairment
(or reversal of an impairment) that resulted in recognition of
the related assets at fair value in the previous GAAP financial
statements may be recognized as a previous GAAP revaluation
for purposes of applying this exemption. However, when the
previous GAAP impairment was determined for a group of
impaired assets (i.e., a cash generating unit), the recognized
value of an individual asset needs to have been broadly
comparable to its fair value for the purposes of this exemption.
If the deemed cost of an asset was determined before the date
of transition to Ind AS, then deemed cost forms the basis for
the cost of the asset under Ind AS at the date the valuation was
performed and not at the date of transition. Depreciation under
Ind AS is determined from the date deemed cost is applied till
the date of transition.
In addition to PPE, Ind AS 101 allows the above deemed cost
exemption to be used for the categories of assets listed below:

50 | Guide to First-time Adoption of Ind AS

Investment property accounted for in accordance with the


cost model in Ind AS 40, and
Intangible assets meeting recognition criteria and criteria
for revaluation under Ind AS 38 (they need to have an
active market)

A first-time adopter cannot use the above mentioned deemed


cost approach for any other asset or liability. The use of fair
value or revaluation as deemed cost for intangible assets
will be very limited in practice because of the definition of
an active market in Ind AS 113 Fair Value Measurement. An
active market is defined as one in which transactions for
the item take place with sufficient frequency and volume to
provide pricing information on an ongoing basis. Therefore, a
first-time adopter will not be able to apply this exemption to
most intangible assets.
It is important to note that the abovementioned deemed cost
exemption in Ind AS 101 does not take classes or categories
of assets as its unit of measure, but refers to an item of
PPE and similarly for investment property and intangible
assets. Ind AS 16 does not prescribe the unit of measure for
recognition, i.e., what constitutes an item of PPE. Therefore,
judgment is required in applying the recognition criteria to
an entitys specific circumstances. A first time adopter can,
therefore, elect to apply this deemed cost exemption to only
some of its assets. For example, it could elect to apply the
exemption only to:

A selection of properties

Part of a factory, or

Some of the assets leased under a single finance lease.

Example 2: Fair value as deemed cost


Background
FTA Limited is a pharmaceutical company, and its balance
sheet contains items of PPE, purchased patents and
borrowings. In an earlier year before transition to Ind AS,
FTA has revalued its PPE to market value in its Indian GAAP
financial statements. FTA also has some development
projects in progress that meet the criteria in Ind AS 38 to
be recognized as assets. FTA has recognized these costs as
an intangible asset under Indian GAAP. Can management
apply the fair value as deemed cost exemption to the
development projects in progress?

Application of requirements
Management can apply the exemption to use fair value
as deemed cost to the PPE only. If the Indian GAAP
revaluation of PPE met the specified conditions, the fair
value of these assets calculated in accordance with Indian
GAAP can be used as deemed cost at the date of fair
valuation. The purchased patents and development projects
do not meet the criteria in Ind AS 38 for the revaluation of
intangible assets, since there is no active market.

b) Event-driven fair value measurement as deemed cost


A first-time adopter may have established a deemed cost in
accordance with previous GAAP for some or all of its assets and
liabilities by measuring them at their fair value at one particular
date because of an event such as a privatization or initial public
offering. Ind AS 101 allows following exemptions in respect of
such event-driven fair values:
(i)

If the measurement date is at or before the date of


transition to Ind AS, the entity may use such event-driven
fair value measurements as deemed cost for Ind AS at the
date of that measurement.

(ii) If the measurement date is after the date of transition


to Ind AS, but during the period covered by the first
Ind AS financial statements, the event-driven fair
value measurements may be used as deemed cost
when the event occurs. An entity should recognize
the resulting adjustments directly in retained earnings
(or if appropriate, another category of equity) at the
measurement date.
Ind AS 101 describes these revaluations as deemed cost in
accordance with previous GAAP. Therefore, to the extent
that they related to an event that occurred prior to its date of
transition or during the comparative period presented under
Ind AS, they can only be used as the basis for deemed cost if
they were recognized in the first-time adopters previous GAAP
financial statements.
The fair value or revaluation as deemed cost exemption
discussed above, only applies to items of PPE, investment
property and certain intangible assets. The event-driven
deemed cost exemption may be applied selectively to some or
all assets and liabilities of a first time adopter.
Although a first-time adopter may use an event-driven fair
value measurement as deemed cost for any asset or liability, it
does not have to use them for all assets and liabilities that were
revalued as a result of the event.
c) Use of Indian GAAP carrying amount as deemed cost
A first-time adopter may opt to continue with the carrying value
for all of its PPE as recognized in its previous GAAP financial
statements and use that as its deemed cost at the transition
date. However, the entity should make necessary adjustments
for decommissioning liabilities to be included in the carrying
value of PPE. The following key points are to be noted for this
option:

Guide to First-time Adoption of Ind AS |

51

Consider that a US subsidiary was not consolidated under


Indian GAAP because it did not satisfy control criteria
according to AS 21. Under Ind AS, such subsidiary will be
consolidated based on definition of control given in Ind AS
110. For purpose of deemed cost exemptions, the fixed
asset amounts recognized by the US subsidiary under its
previous GAAP will be used.

a) The option is available only where there is no change in the


functional currency of the entity on the date of transition
to Ind AS.
b) The option if elected needs to be applied to all items of
PPE. Unlike fair value as deemed cost exemption, this
exemption cannot be applied on item-by-item basis.
c) If the previous GAAP financial statements are Indian
GAAP CFS, the previous GAAP amount of the subsidiary
should be the Indian GAAP amounts used in preparing and
presenting Indian GAAP CFS.
d) Where a subsidiary was not consolidated under previous
GAAP, the amount required to be reported by the
subsidiary according to the previous GAAP in its individual
financial statements should be the previous GAAP amount.

e) If an entity avails this option, only adjustment allowed


to previous GAAP carrying value is for decommissioning
liabilities. No other adjustment due to application of other
Ind ASs is allowed.
f)

This option can also be availed for intangible assets and


investment property.

Example 3: Practical issue in interaction with exemption for past business combinations
Background
In accordance with Ind AS 101, a first-time adopter may choose to restate all past business combinations or combinations
occurring after a chosen date. If a first-time adopter restates any business combination to comply with Ind AS 103
Business Combinations, it needs to restate all later business combinations.
Consider that an entity, whose date of transition to Ind AS is 1 April 2015, decides to use Ind AS 101 exemption for
continuing its PPE at previous GAAP carrying amount. The entity had acquired a subsidiary in 2013. The acquisition
constitutes a business combination under Ind AS 103. The entity also decides to use business combination exemption in a
manner to restate all combinations occurring after 1 January 2013. The relevant information regarding subsidiarys PPE at
1 April 2015 is given below:
Previous GAAP carrying value used for consolidation:

INR120 million

Fair value at the acquisition date:

INR180 million

Written down value (acquisition date fair value less


cumulative depreciation upto transition date:

INR165 million

At what amount should the entity recognize the PPE of the subsidiary in its Ind AS opening balance sheet?

Application of requirements
There is an apparent conflict between the two exemptions. The exemption relating to business combination used by the
entity requires it to use the fair value of the PPE as of the acquisition date as cost to arrive at the transition date value.
Therefore, the entity should recognize the PPE of subsidiary at INR165 million. The PPE exemption requires that for all
items of PPE, the amount recognized in the Indian GAAP CFS will be carried forward, without any adjustment (except
decommissioning cost). Therefore, the entity should recognize the PPE of the subsidiary at INR120 million. There is a
conflict between the two exemptions. As a result of this conflict, three views seem possible: (a) PPE exemption will override
the business combination exemption, (b) business combination exemption will override the PPE exemption, or (c) the two
exemptions are not mutually exclusive and hence entities have a free choice on using either the PPE exemption or the
business combination exemption. Till the time the MCA or the ICAI provide any further guidance to resolve this issue, a
first-time adopter may be able to select one of these views as the accounting policy in preparing its opening Ind AS balance
sheet. The view once selected should not be changed.

52 | Guide to First-time Adoption of Ind AS

The use of Indian GAAP carrying amount as deemed cost


exemption for PPE, investment property and intangible asset
may reduce the quantum of conversion efforts required at the
transition date. However, it may be noted that this particular
exemption does not exist under IASB IFRS. Hence, if an entity
decides to use this exemption, it will depart from IASB IFRS.

Decommissioning liabilities included in the cost of PPE


In accordance with Ind AS 16, the cost of an item of PPE
includes the initial estimate of costs of dismantling and
removing the item and restoring the site on which it is located,
the obligation for which is incurred either when the item
is acquired or as a consequence of having used the item
during a particular period for purposes other than to produce
inventories during that period. Therefore, a first-time adopter
needs to ensure that PPE cost includes decommissioning
provision determined in accordance with Ind AS 37 Provisions,
Contingent Liabilities and Contingent Assets.

a) Measure the liability at the date of transition to Ind AS in


accordance with Ind AS 37,
b) Estimate the amount that would have been included
in the cost of the related asset when the liability first
arose, by discounting the liability to that date using its
best estimate of the historical risk-adjusted discount
rate(s) that would have applied for that liability over the
intervening period, and
c) Calculate the accumulated depreciation on that amount, as
at the transition date, on the basis of the current estimate
of the useful life of the asset, using the entitys Ind AS
depreciation policy.

Appendix A to Ind AS 16 requires specified changes in a


decommissioning, restoration or similar liability to be added to
or deducted from the cost of the asset to which it relates; the
adjusted depreciable amount of the asset is then depreciated
prospectively over its remaining useful life. To apply these
requirements retrospectively, a first-time adopter will need to
construct historical records of all such adjustments that should
have been made in the past. This may not be practicable in all
the cases. To address these practical difficulties, Ind AS 101
allows an exemption whereby a first-time adopter may elect for
such liabilities incurred before the date of transition, to:

Guide to First-time Adoption of Ind AS |

53

Example 4: Decommissioning liability


Background
FTA Limiteds date of transition to Ind AS is 1 April 2015. It has built a plant that was completed and ready for use on 1
April 2010. The facts relevant to the plant are summarized below:
Cost

INR1,400

Residual value

INR200

Economic life 20 years


Original estimate of decommissioning cost to be incurred

INR75

Revised estimate at 1 April 2015 of decommissioning cost

INR300

Discount rate applicable (assumed to be constant)

5.65%

Discounted value of original decommissioning liability on 1 April 2010

INR58

Discounted value of revised decommissioning liability on 1 April 2010

INR100

Discounted value of revised decommissioning liability on 1 April 2015

INR131

Assume that FTA Limited is not accounting for decommissioning liability under Indian GAAP.

Application of requirements
Full retrospective application of Appendix A to Ind AS 16 will require FTA Limited to go back in time and account for each
revision of the decommissioning provision. Keeping in view practical difficulties, Ind AS 101 allows the following treatment
to be followed:
Recognize decommissioning liability based on discounted value
of revised liability on 1 April 2015, i.e.,

INR131

Amount to be added to cost of plant


Discounted value of revised decommissioning liability on 1 April 2010

INR 100

Accumulated depreciation on the above amount

= INR100 x 5/20 =

INR25

Net amount to be capitalized

= INR100 25 =

INR75

Entry to be passed
Debit Plant

INR75

Debit Retained earnings

INR56

Credit Decommissioning liability

INR131

54 | Guide to First-time Adoption of Ind AS

In the example above, carrying value of the plant at the opening


balance sheet date may have been determined either using or
not using the fair value as deemed cost exemption. An entity,
which has used the fair value as deemed cost option and elects
to use the decommissioning liabilities exemption, should be
aware that the interaction between these exemptions may
lead to a potential overstatement of the underlying asset. To
address this issue, a first-time adopter should assess whether
the fair value of the asset is inclusive or exclusive of the
decommissioning obligation and make necessary adjustment to
remove the potential overstatement.

Ind AS 101 also recognizes that in some cases, a first time


adopter may make the same determination of whether an
arrangement contained a lease in accordance with previous
GAAP as that required by Appendix C to Ind AS 17. However,
this assessment is made at a date other than the date required
by Appendix C to Ind AS 17. In such cases, the first-time
adopter is not required to reassess that determination when
it adopts Ind AS. However, this option can be used only if the
assessment made under the previous GAAP would have given
the same outcome as that resulting from applying Ind AS 17
and its Appendix C.

Leases

This voluntary exemption only applies to the assessment of


whether an arrangement contains a lease. If an arrangement
is determined to contain a lease, a first-time adopter applies
Ind AS 17 to determine the classification of the lease as
an operating or finance lease, from the inception of the
arrangement.

Identification of embedded leases


AS 19 Leases does not provide any specific guidance to
determine whether an arrangement in substance conveys right
to use an asset. Hence, under Indian GAAP, lease accounting is
normally applied to transactions, which are structured as lease.
Appendix C to Ind AS 17 Determining whether an Arrangement
contains a Lease prescribes specific principles for identifying
leases contained in an arrangement, comprising a transaction
or a series of related transactions, which does not take the
legal form of a lease but conveys a right to use an asset. In
accordance with Appendix C to Ind AS 17, the determination
whether an arrangement contains a lease is made at the
inception of the arrangement, which is the earlier of the
date of the arrangement and the date of commitment by the
parties to the principal terms of the arrangement. If a firsttime adopter has entered into an arrangement potentially
containing lease several years back, the entity is likely to face
significant practical difficulties in going back, potentially many
years, and making a meaningful assessment of whether the
arrangement satisfied the criteria at that time. To address
practical difficulties, Ind AS 101 states that a first-time adopter
can elect to make this assessment as of the date of transition
based on the facts at that date, rather than at inception of the
arrangement. In other words, a first-time adopter may assess
arrangements existing as of the date of transition to Ind AS
to determine if the arrangements contain a lease on the basis
of facts and circumstances as of the date of transition, as
opposed to facts and circumstances as of date of inception or
modification of arrangements.

Land leases
Since AS 19 did not contain any specific guidance on
accounting for land leases, Indian entities were accounting for
such leases in different ways under Indian GAAP. In contrast, Ind
AS 17 requires a lease of land to be assessed as an operating or
finance lease, based on the same criteria that are applicable for
lease of other assets. Ind AS 17 also states that when a lease
includes both land and building elements, an entity assesses the
classification of each element as finance or an operating lease
separately in accordance with the criteria laid in the standard.
In determining whether the land element is an operating or a
finance lease, an important consideration is that land normally
has an indefinite economic life.
Ind AS 101 does not require Ind AS 17 to be applied
retrospectively to land leases and it allows a voluntary
exemption on the matter. In accordance with the exemption,
when a lease includes both land and building elements, a first
time adopter may assess the classification of each element as
finance or an operating lease at the date of transition to Ind AS
on the basis of facts and circumstances existing as at that date.
If there is any land lease newly classified as finance lease at the
transition date, which was classified differently under previous
GAAP, then the first time adopter may recognize assets and
liability at fair value on that date; and any difference between
those fair values is recognized in retained earnings.

Guide to First-time Adoption of Ind AS |

55

Service concession arrangements

Amortization of toll roads

As stated above, Appendices C to Ind AS 115 requires that


infrastructure within its scope should not be recognized as
property, plant and equipment of the operator, since the asset
is controlled by the grantor. Instead, the operator recognizes
a financial asset to the extent that it has an unconditional right
to receive consideration from the grantor or the grantor has
guaranteed the operators cash flow. The operator recognizes
an intangible asset to the extent it has a right to charge users of
the public service.

Under Indian GAAP, Schedule II to the Companies Act, 2013,


allows revenue based amortization for toll roads created under
a service concession arrangement. Considering this, certain
Indian companies amortize their toll roads using revenue- based
amortization.

Ind AS 101 requires that a first-time adopter should apply


Appendix C to Ind AS 115 retrospectively. However, in some
cases, it may so happen that it is not practical to apply the
requirements of Appendix C to Ind AS 115, retrospectively,
e.g., because it is not practical to determine the fair value of
construction and other services, which were rendered in the
past. In such cases, Ind AS 101 gives first-time adopters a
voluntary exemption to apply the following treatment:

Recognize financial and intangible assets that existed at


the date of transition to Ind AS
Use the previous carrying amounts as the carrying
amount at that date (no matter how they were previously
classified), and
Test the financial and intangible assets recognized at that
date for impairment.

Hence, a first-time adopter will not be required to apply


measurement requirements of Appendix C to Ind AS 115,
retrospectively; however, it will still be required to apply
classification requirements retrospectively. Moreover, unlike
most of other exemptions, this exemption is applicable only
to those arrangements where retrospective application is not
practical. This exemption should not be treated as a free choice.
There will be a high hurdle for companies to claim practicality
as a means to avoid retrospective application. This decision is
made for each arrangement separately.

Ind AS 38 prohibits use of revenue based amortization method.


For companies which have used revenue based amortization
under Indian GAAP, Ind AS 101 read with Ind AS 38 gives
an option to continue revenue based amortization for toll
roads recognized in the financial statements3 for the period
immediately before the beginning of the first Ind AS financial
statements . However, such amortization will not be allowed for
any new toll road arising from service concession arrangements
entered into after the beginning of the first Ind AS reporting
period.
Consider that a company will apply Ind AS for the first time in
its financial statements for the year ended 31 March 2017.
Its date of transition is 1 April 2015 and its last Indian GAAP
financial statements were prepared for the year ended 31
March 2016. For any toll road recognized on or before 31
March 2016, the company has the option of continuing
revenue based amortization. It should be noted that this is
an option. In other words, a company is free to use Ind AS
38 for amortization. For any new toll arising from the service
concession arrangements entered into after 1 April 2016,
revenue based amortization will not be allowed. Rather, the
company has to mandatorily apply Ind AS 38 for amortization.

3 Please also refer the booklet titled IFRS-converged Indian Accounting Standards Outreach meeting dated 15 January 2015, published by the
Accounting Standards Board of the ICAI.

56 | Guide to First-time Adoption of Ind AS

Revenue
Ind AS 115 Revenue from Contracts with Customers sets-out
principles that an entity applies to report useful information
about the amount, timing, and uncertainty of revenue and cash
flows arising from its contracts to provide goods or services to
customers. The core principle requires an entity to recognize
revenue to depict the transfer of goods or services to customers
in an amount that reflects the consideration that it expects to
be entitled to in exchange for those goods or services.
Ind AS 115 is a significant change from current Indian GAAP.
Although it provides more detailed application guidance,
entities will need to use more judgment in applying its
requirements, in part, because the use of estimates is more
extensive. The potential changes to revenue recognition for
some entities may be significant.
Ind AS 101 gives voluntary exemption whereby a first-time
adopter may use one or more of the following practical
expedients when applying Ind AS 115 retrospectively:
1. For completed contracts, an entity need not restate contracts that
begin and end within the same annual reporting period.
2. For completed contracts that have variable consideration, an
entity may use the transaction price at the date the contract was
completed rather than estimating variable consideration amounts
in the comparative reporting periods, and
3. For all reporting periods presented before the beginning of
the first Ind AS reporting period, an entity need not disclose
the amount of the transaction price allocated to the remaining
performance obligations and an explanation of when the entity
expects to recognize that amount as revenue.

Entities may elect to apply none, some or all of these


expedients. However, if an entity elects to use any of them, it
must apply that expedient consistently to all contracts within all
periods presented. In addition, entities are required to disclose
the following information:
a) The expedients that have been used; and
b) To the extent reasonably possible, a qualitative assessment
of the estimated effect of applying each of those
expedients.

Business combinations
and consolidation
Accounting for business combinations under Ind AS is
significantly different from that required under Indian GAAP.
Retrospective application of Ind AS 103 to past business
combinations may not be practical in all cases. Consider that
an Indian company acquired a subsidiary almost 10 years
back. Under Indian GAAP, as required by AS 21 Consolidated
Financial Statements, the company recognized assets and
liabilities of the subsidiary at book value. To apply Ind AS 103
retrospectively, the parent company will need to go back in the
history and determine acquisition date fair values of assets and
liabilities of the subsidiary. Considering the long-period of time,
this may be impractical.
Against this background, besides deemed cost exemption
for PPE, business combinations exemption in Ind AS 101 is
probably the most significant exemption. It provides a first-time
adopter an exemption from restating business combinations
prior to its date of transition to Ind AS.

Business combinations prior to the


transition date
A first-time adopter must account for any business combination
occurring after its date of transition under Ind AS 103, i.e., any
business combinations during the comparative periods need
to be restated in accordance with Ind AS. An entity may elect
not to apply Ind AS 103 to business combinations occurring
before the date of transition. However, if a first-time adopter
does restate a business combination occurring prior to its date
of transition to comply with Ind AS 103, it must also restate any
subsequent business combinations under Ind AS 103 and apply
Ind AS 110 Consolidated Financial Statements from that date
onwards. In other words, as shown on the time line below, a
first-time adopter is allowed to choose any date in the past from
which it wants to account for all business combinations under
Ind AS 103 without having to restate business combinations
that occurred prior to such date.

A first-time adopter is not required to restate contracts


that were completed before the earliest period presented.
A completed contract is a contract for which the entity has
transferred all of the goods or services identified in accordance
with previous GAAP.

Guide to First-time Adoption of Ind AS |

57

Mandatory application of Ind AS 103

Optional restatement under Ind AS 103

1/4/2015

1/4/2016

31/3/2017

Date of transition
to Ind AS

Beginning of
first Ind AS
reporting

Ind AS Reporting
date

Opening Ind AS
balance sheet

This exemption is available to all the transactions that meet


definition of a business combination under Ind AS 103,
irrespective of their classification under the previous GAAP.
However, if the past acquisition is only an asset acquisition and
not a business combination under Ind AS 103, this exemption
does not apply. Rather, the acquirer may consider applying
other applicable optional exemptions.
A first time adopter may even decide to apply Ind AS 103
retrospectively to all past business combinations. Neither
Ind AS 103 nor Ind AS 101 prohibits such retrospective
application. However, a first-time adopter should consider
whether retrospective application of Ind AS 103 requires undue
use of hindsight. If so, it may be advisable to avoid retrospective
application of Ind AS 103 beyond a date when the first-time
adopter can get information to apply Ind AS 103 without undue
use of hindsight. Ind AS 101 prohibits use of hindsight.
Business combination exemption also applies to past
acquisitions of associates, interests in joint ventures and
interests in joint operations. Therefore, a first-time adopter
taking advantage of the exemption will not have to revisit past
business combinations, acquisitions of associates and joint
ventures to establish fair values and amounts of goodwill/capital
reserve under Ind AS. However, application of the exemption
may be complex, and certain adjustments to transactions under
the previous GAAP may still be required. When the exemption
is applied:

58 | Guide to First-time Adoption of Ind AS

Classification of the combination as an acquisition, reverse


acquisition or a pooling of interests does not change. As
long as the transaction is a business combination within
the scope of Ind AS 103, the previous GAAP accounting
would be eligible to be carried forward with specific
adjustments.
In the opening Ind AS balance sheet, a first-time adopter
should recognize all assets acquired and liabilities assumed
in a past business combination, with the exception of:

Certain financial assets and liabilities that were


derecognized and fall under the derecognition
exception (refer Financial Instruments section), and
Assets (including goodwill) and liabilities that were
not recognized in the acquirers consolidated balance
sheet under the previous GAAP and that would not
qualify for recognition under Ind AS in the individual
balance sheet of the acquiree. For instance, the
acquirer did not recognize the acquirees internally
developed brand as a separate intangible asset under
the previous GAAP. The acquirer does not recognize
the brand in its opening Ind AS balance sheet since
Ind AS 38 does not allow acquiree to recognize it
as an asset in its separate Ind AS balance sheet.
Consequently, any value attributable to the brand
remains subsumed in goodwill in the acquirers
opening Ind AS balance sheet.

The first-time adopter should recognize any resulting


change by adjusting retained earnings (or, if appropriate,
another category or equity), unless the change results from
the recognition of an intangible asset previously subsumed
in goodwill.

If a first-time adopter has recognized certain items as


assets/liabilities under the previous GAAP which do not
qualify for recognition under Ind AS, it should exclude
those items from its opening Ind AS balance sheet.
An intangible asset, acquired as part of a business
combination, which does not qualify for recognition
as an asset under Ind AS 38 should be derecognized,
with the related deferred tax and NCI, with an offsetting
change to goodwill (unless the entity previously deducted
goodwill directly from equity under its previous GAAP) or
capital reserve (to the extent not exceeding the balance
available in that reserve). All other changes resulting
from derecognition of such assets and liabilities should
be accounted for as adjustments of retained earnings or
another category of equity, if appropriate. For example,
any restructuring provisions recognized under the previous
GAAP and which remain at the Ind AS transition date will
need to be assessed against the Ind AS recognition criteria.
If the criteria are not met, then the provisions must be
reversed against retained earnings.
For assets and liabilities that are accounted for on a cost
basis under Ind AS, the carrying amount in accordance
with the previous GAAP of assets acquired and liabilities
assumed in that business combination is their deemed
cost immediately after the business combination. This
deemed cost is the basis for cost-based depreciation or
amortization from the date of the business combination.
Ind AS requires subsequent measurement of some
assets and liabilities on a basis that is not based on the
original cost, for example, investment in equity shares
and derivative instruments are measured at fair value.
The first-time adopter should measure these assets and
liabilities on that basis in its opening Ind AS balance sheet,
even if they were acquired or assumed in a past business
combination. It should recognize any resulting change in
the past carrying amount by adjusting retained earnings
(or, if appropriate, another category of equity), rather than
goodwill.

An asset acquired or a liability assumed in a past business


combination may not have been recognized under the
previous GAAP. However, this does not mean that such
items have a deemed cost of zero in the opening Ind
AS balance sheet. Instead, the acquirer recognizes and
measures those items in its opening Ind AS balance sheet
on the basis that Ind AS will require in the balance sheet of
the acquiree.
Consider that the acquirer had not, in accordance with its
previous GAAP, capitalized finance leases acquired in a past
business combination. It should capitalize those leases in its
consolidated financial statements. This is done on the same
basis as Ind AS 17 Leases will require the acquiree to do in
its Ind AS balance sheet.

Example 5: Contingent liability not


recognized under previous GAAP
FTA Limited has acquired B Limited before date of
transition to Ind AS. In its consolidated balance sheet,
FTA did not recognize a contingent liability that still
exists at the date of transition to Ind AS.
FTA should assess whether Ind AS 37 Provisions,
Contingent Liabilities and Contingent Assets requires
its recognition in the financial statements of the
acquiree (B Limited) at the transition date. If so, FTA
should recognize that contingent liability at the date
of transition to Ind AS. However, if B Limited is not
allowed to recognize the liability under Ind AS 37
because outflow is not probable, contingent liability
is not recognized in the opening Ind AS balance sheet
of FTA. This is despite the fact that on the application
of Ind AS 103, FTA would have been required to
recognize the contingent liability.

Guide to First-time Adoption of Ind AS |

59

If a first time adopter recognizes assets acquired and


liabilities assumed in past business combinations that
were not recognized under the previous GAAP, the change
resulting from the recognition should be accounted for as
an adjustment of retained earnings or another category of
equity, if appropriate. However, if the change results from
the recognition of an intangible asset that was previously
subsumed in goodwill, it should be accounted for as an
adjustment of that goodwill.

Ind AS 101 prohibits restatement of goodwill for most


other adjustments reflected in the opening Ind AS balance
sheet. Therefore, a first-time adopter electing not to
apply Ind AS 103 retrospectively is not permitted to make
any adjustments to goodwill other than those described
above. For example, a first-time adopter cannot restate the
carrying amount of goodwill:

A first-time adopter takes the carrying amount of goodwill


under the previous GAAP at the date of transition to Ind AS
as a starting point and only adjusts it as follows:

Goodwill is increased by the carrying amount of any


intangible asset acquired in a business combination
under the previous GAAP (less any related deferred
tax and NCI), that does not meet Ind As recognition
criteria.
Goodwill is decreased if a first-time adopter is required
to recognize an intangible asset that was subsumed in
goodwill under the previous GAAP. It adjusts deferred
tax and NCI accordingly.
Goodwill must be tested for impairment at the date
of transition to Ind AS in accordance with Ind AS 36
Impairment of Assets regardless of whether there is
any indication that the goodwill may be impaired. Any
resulting impairment loss is recognized in retained
earnings unless Ind AS 36 requires it to be recognized
in a revaluation surplus.

60 | Guide to First-time Adoption of Ind AS

To exclude in-process research and development


acquired in that business combination (unless the
related intangible asset would qualify for recognition
in accordance with Ind AS 38 in the balance sheet of
the acquiree)
To adjust previous amortization of goodwill
To reverse adjustments to goodwill that Ind AS 103
would not permit, but were made under the previous
GAAP because of adjustments to assets and liabilities
between the date of the business combination and the
date of transition to Ind AS.

Example 6: Application of business combinations exemption


FTA Limited (FTA) prepares its first Ind AS financial statements with reporting date of 31 March 2017 and comparative
information of the year ended 31 March 2016 only. FTAs date of transition to Ind AS is 1 April 2015. On 1 September
2013, FTA had acquired 100% of subsidiary XYZ. Under Indian GAAP, FTA:

Classified the business combination as an acquisition by FTA


Measured the assets acquired and liabilities assumed at the following amounts under Indian GAAP at 1
April 2015 (date of transition to Ind AS):

Property, plant and equipment INR400 (under Indian GAAP); on 1 September 2013: INR500 (under Indian GAAP)

FVTOCI Investments INR200 (Market value: INR600)

Pension liability Nil (Ind AS 19 net liability: INR60)

Unamortized VRS expenses INR50

Goodwill INR360

In the opening (consolidated) Ind AS balance sheet, FTA decides to use business combination exemption whereby it will
not restate the past combination. Accordingly, FTA:

Classifies the business combination as an acquisition by FTA, even if it would have qualified under Ind AS
103 as reverse acquisition by the subsidiary XYZ.
Does not adjust the accumulated amortization of goodwill under Indian GAAP. FTA tests goodwill for
impairment under Ind AS 36 and recognizes any resulting impairment loss.
Measures property, plant and equipment which require cost based measurement after acquisition at
carrying amount under Indian GAAP immediately after business combination as their deemed cost. The
asset will be stated at INR500 on 1 September 2013. The 1 April 2015 value is derived using Ind AS
accounting from 1 September 2013 to 31 March 2015 for PPE on the balance of INR500. FTA may use
further exemptions that are available for PPE at the transition date.
Measures FVTOCI investments at fair value of INR600 and adjusts the corresponding effect in equity as a
gain on investments (INR400).

Recognizes a pension liability at INR60 with a corresponding debit/credit to retained earnings.

Writes off unamortized VRS expenditure with a corresponding debit to retained earnings.

Tests assets for impairment, if there is any indication that identifiable assets are impaired, based on
conditions that existed at the date of transition to Ind AS.

Guide to First-time Adoption of Ind AS |

61

If the first-time adopter recognized goodwill in accordance


with the previous GAAP as a deduction from equity:

It should not recognize that goodwill in its opening


Ind AS balance sheet. Furthermore, it should not
reclassify that goodwill to profit or loss if it disposes
of the subsidiary or if the investment in the subsidiary
becomes impaired.
Adjustments resulting from the subsequent resolution
of a contingency affecting the purchase consideration
will be recognized in retained earnings.

The measurement of NCI and deferred tax follows from


the measurement of other assets and liabilities. Therefore,
the above adjustments to recognized assets and liabilities
affect NCI and deferred tax.

Transition accounting for contingent


consideration
Business combination exemption under Ind AS 101 does
not extend to contingent consideration that arose from a
transaction that occurred before the transition date, even
if the acquisition itself is not restated due to the use of the
exemption. Therefore, such contingent consideration is
recognized at its fair value at the transition date, regardless
of the accounting under the previous GAAP. If contingent
consideration was not recognized at fair value at the date of
transition under the previous GAAP, the resulting adjustment
is recognized in retained earnings or other category of equity,
if appropriate. Subsequent adjustments will be recognized
following the provisions of Ind AS 103.

Previously unconsolidated subsidiaries


Under the previous GAAP, a first-time adopter may not
have consolidated a subsidiary acquired in a past business
combination. For example, this may be the case because the
parent did not regard it as a subsidiary under the previous
GAAP or it did not prepare CFS. A first-time adopter applying
the business combinations exemption should adjust the
carrying amounts of the subsidiarys assets and liabilities to the
amounts that Ind AS would require in the subsidiarys balance
sheet. The deemed cost of goodwill equals the difference at the
date of transition to Ind AS between:
a) The parents interest in those adjusted carrying amounts,
and
b) The cost in the parents separate financial statements of its
investment in the subsidiary.

62 | Guide to First-time Adoption of Ind AS

This exemption requires a first-time adopter to compare the


parents share in net assets of subsidiary at transition date
with the carrying value of the investment in its separate
financial statements prepared using Ind AS 27. This is no
more than a pragmatic plug that facilitates the consolidation
process but does not represent the true goodwill that might
have been recorded if Ind AS had been applied to the original
business combination.
If a first-time adopter, in its separate financial statements, does
not opt to measure its cost of investment in a subsidiary at its
transition date fair value, the deemed cost of the goodwill is
calculated by comparing the original cost of the investment to
its share of the carrying amount of the net assets determined
on the transition date. This could give rise to negative goodwill/
minimal goodwill, in case of a profitable subsidiary. Moreover,
the subsidiarys past dividend distribution may impact the
deemed cost of goodwill.
This exemption does not apply to previously unconsolidated
subsidiaries which the parent did not acquire in a business
combination, but established them. Ind AS 101 does not
provide any specific guidance on such cases. However,
implementation guidance to IFRS 1 states that if the parent
did not acquire a previously unconsolidated subsidiary, it does
not recognize goodwill in relation to those subsidiaries. Any
difference between the carrying amount of the subsidiary
and the net identifiable assets as determined above would be
treated as an adjustment to retained earnings, representing the
accumulated profits or losses that would have been recognize
as if the subsidiary had always been consolidated. We believe
that the position stated under IFRS 1 is correct for previously
unconsolidated subsidiaries, which the parent did not acquire,
but established them. Hence, this guidance under IFRS 1 should
apply under Ind AS also.

Previously consolidated entities that are not


subsidiaries
A first-time adopter may have consolidated an investment
under the previous GAAP that does not meet the definition
of a subsidiary under Ind AS. In such a case, the first time
adopter should first determine the appropriate classification of
investment under Ind AS and apply the first-time adoption rules
in Ind AS accordingly. For example, such previously consolidated
investments may be accounted for as either:

An associate or a joint venture: If it is determined that


an investment should be accounted for using the equity
method of accounting as described in Ind AS 28 Investments
in Associates and Joint Ventures, the first-time adopter
applying the business combinations exemption should also
apply that exemption to past acquisitions of investments
in associates/joint ventures. If the business combinations
exemption is not applicable or the entity did not acquire
the investment in the associate or joint venture, Ind AS 28
should be applied retrospectively.
An investment under Ind AS 109 if it is determined that an
investment is not a subsidiary, associate, or joint venture, or
n executory contract or service concession arrangement:
A
there are no first-time adoption exemptions that apply;
therefore, Ind AS should be applied retrospectively.

Currency adjustments to goodwill


Ind AS 21 The Effects of Changes in Foreign Exchange Rates
requires that any goodwill arising on the acquisition of a foreign
operation and any fair value adjustments to the carrying
amounts of assets and liabilities arising on the acquisition of
that foreign operation should be treated as assets and liabilities
of the foreign operation. For a first-time adopter, it may be
impracticable, especially after corporate restructuring, to
determine retrospectively the currency in which goodwill and fair
value adjustments should be expressed.

To address these practical challenges, Ind AS 101 contains a


voluntary exemption whereby a first-time adopter need not
apply this requirement of Ind AS 21 retrospectively to fair value
adjustments and goodwill arising in business combinations that
occurred before the date of transition to Ind AS. If Ind AS 21
is not applied retrospectively, a first-time adopter should treat
such fair value adjustments and goodwill as assets and liabilities
of the entity rather than as assets and liabilities of the acquiree.
Therefore, those goodwill and fair value adjustments are either
already expressed in the entitys functional currency or are nonmonetary foreign currency items, which are reported using the
exchange rate applied under the previous GAAP.
If a first-time adopter chooses not to take the exemption
mentioned above, it must apply Ind AS 21 retrospectively to fair
value adjustments and goodwill arising in either:

All business combinations that occurred before the date of


transition to Ind AS, or
All business combinations that the entity elects to restate to
comply with Ind AS 103.

Assets and liabilities of subsidiaries,


associates and joint ventures
Subsidiary becomes a first-time adopter later than
its parent
If a subsidiary becomes a first-time adopter later than its parent,
it should, in its financial statements, measure its assets and
liabilities at either:

The carrying amounts that would be included in the parents


CFS, based on the parents date of transition to Ind AS, if
no adjustments were made for consolidation procedures
and for the effects of the business combination in which the
parent acquired the subsidiary. However, this election is not
available to a subsidiary of an investment entity, as defined
in Ind AS 110, or
The carrying amounts required by the rest of Ind AS 101,
based on the subsidiarys date of transition to Ind AS. These
carrying amounts could differ from those described above:

When the exemptions in Ind AS 101 result in


measurements that depend on the date of transition to
Ind AS.
When accounting policies used in the subsidiarys
financial statements differ from those in the CFS. For
example, the subsidiary may use as its accounting
policy the cost model in Ind AS 16, whereas, the group
may use the revaluation model.

Guide to First-time Adoption of Ind AS |

63

If a subsidiary was acquired after the parents date of transition


to Ind AS, then it cannot apply the first option because there
are no carrying amounts included in the parents CFS, based on
the parents date of transition.

If an entity becomes a first-time adopter for its separate


financial statements earlier or later than for its CFS, it should
measure its assets and liabilities at the same amounts in both
financial statements, except for consolidation adjustments.

A similar election is available to an associate or joint venture


that becomes a first-time adopter later than an entity that has
significant influence or joint control over it.

As drafted, the requirement is merely that the same basis


be used, without being explicit as to which set of financial
statements should be used as the benchmark. However, it
seems clear from the context that the measurement basis used
in whichever set of financial statements first comply with Ind AS
must also be used when Ind AS are subsequently adopted in the
other set.

Parent becomes a first-time adopter later than


its subsidiary
If an entity becomes a first-time adopter later than its
subsidiary (or associate or joint venture), the entity should,
in its CFS, measure the assets and liabilities of the subsidiary
(or associate or joint venture) at the same carrying amounts
as in the financial statements of the subsidiary (or associate
or joint venture), after adjusting for consolidation and equity
accounting adjustments and for the effects of the business
combination in which the entity acquired the subsidiary.
Unlike other exemptions, this exemption does not offer a choice
between different accounting alternatives. A subsidiary, which
adopts Ind AS later than its parent, can choose to prepare
its first Ind AS financial statements by reference to its own
date of transition to Ind AS or that of its parent. However,
the parent itself must use the Ind AS measurements already
used in the subsidiarys financial statements, adjusted as
appropriate for consolidation procedures and the effects of
business combination in which it acquired the subsidiary. This
exemption does not preclude the parent from adjusting the
subsidiarys assets and liabilities for a different accounting
policy, e.g., cost or revaluation for accounting for property,
plant and equipment. The exemption, however, limits the
choice of exemptions (e.g., the deemed cost exemption) with
respect to the accounts of the subsidiary in the transition date
consolidated accounts.

Adoption of Ind AS on different dates in separate and


consolidated financial statements
An entity may sometimes become a first-time adopter for
its separate financial statements earlier or later than for its
CFS. For example, such a situation may arise when an entity
qualifies for the exemption from preparing CFS both under the
Companies Act, 2013 and Ind AS 110. Hence, in initial years,
it does not prepare CFS and prepares only separate financial
statements under Ind AS. Subsequently, the entity may cease
to be entitled to the exemption or may choose to prepare CFS
voluntarily.

64 | Guide to First-time Adoption of Ind AS

Joint arrangements
Under Indian GAAP, AS 27 Financial Reporting of Interest in
Joint Ventures requires all joint ventures are classified into
three types, i.e.., jointly controlled assets, jointly controlled
operations and jointly controlled entities. An entitys interests
in jointly controlled assets/jointly controlled operations are
accounted for by recognizing its share of assets, liabilities,
revenue and expenses. Investment in a jointly controlled entity
is accounted for by using the proportionate consolidated
method.
Ind AS 111 Joint Arrangements classifies joint arrangements
into two types, i.e., joint ventures and joint operations.
An entitys interest in joint operation is accounted for by
recognizing its share of assets, liabilities, revenue and
expenses. Investment in a joint venture is accounted for by
using equity method.
On transition to Ind AS, a first time adopter is required to
reassess the classification of its joint arrangements (as either
joint ventures or joint operations) on the basis of Ind AS 111
criteria. Based on classification, a first time adopter may
typically have to transition from the proportionate consolidation
method applied under Indian GAAP to equity method under Ind
AS 111.

The following table provides a step-by-step process of transition from proportionate consolidation under the previous GAAP to the
equity method under Ind AS 111 on transition to Ind AS
Recognize investment

Measure investment

Recognize at the date of transition to Ind AS, e.g., 1 April 2015


Aggregate the carrying amounts of the assets and liabilities that the entity had previously
proportionately consolidated

Include any goodwill arising upon acquisition allocated from CGUs, if necessary

Disclose amounts that were aggregated into the investment cost basis

Do not apply initial recognition exception under Ind AS 12


Test if there are impairment indicators

Test for impairment under Ind AS 36 methodology if indicators exist

Recognize any impairment loss in retained earnings at date of transition to Ind AS

Subsequently account for the investment using the equity method

Test for impairment


Apply equity method

If aggregating all previously proportionately consolidated


assets and liabilities results in negative net assets, an entity
should assess whether it has legal or constructive obligations in
relation to the negative net assets and, if so, the entity should
recognize the corresponding liability. If the entity concludes
that it does not have legal or constructive obligations in
relation to the negative net assets, it should not recognize the
corresponding liability but it should adjust retained earnings at
the date of transition to Ind AS. The entity should disclose this
fact, along with its cumulative unrecognized share of losses of
its joint ventures at the date of transition to Ind AS.

Investments in subsidiaries, jointly controlled


entities and associates in separate financial
statements

After initial recognition at the date of transition to Ind AS, an


entity should account for its investment in the joint venture
using the equity method in accordance with Ind AS 28.

If a first-time adopter measures such an investment at cost, it


can measure that investment at one of the following amounts in
its separate opening Ind AS balance sheet:

In the preparation of separate financial statements, Ind AS 27


Separate Financial Statements requires an entity to account for
its investments in subsidiaries, jointly controlled entities and
associates either:
a) At cost, or
b) In accordance with Ind AS 109.

Cost determined in accordance with Ind AS 27

Deemed cost, defined as


Fair value determined in accordance with Ind AS 113


at the date of transition to Ind AS, or
Previous GAAP carrying amount at the transition date.

A first-time adopter may choose to use either of these bases


to measure investment in each subsidiary, joint venture or
associate where it elects to use a deemed cost.

Guide to First-time Adoption of Ind AS |

65

Non-controlling interest
Ind AS 110 contains specific requirements with regard to
accounting for NCI. These requirements, among others, provide
that:
a) An entity attributes the profit or loss and each component
of OCI to the owners of the parent and NCI, even if this
results in the NCI having a deficit balance.
b) When the proportion of the equity held by NCI changes,
an entity adjusts the carrying amounts of the controlling
and non-controlling interests to reflect the changes
in their relative interests in the subsidiary. The entity
recognizes directly in equity any difference between the
amount by which the NCI are adjusted and the fair value
of the consideration paid or received directly in equity and
attributes it to the owners of the parent. Hence, no gain or
loss to be recognized in profit or loss arises in this case.
c) Ind AS 110 contains specific requirements on accounting
for a loss of control over a subsidiary, and the related
requirements to classify all assets and liabilities of that
subsidiary as held for sale.
Ind AS 101 contains a mandatory exception which requires that
a first-time adopter should apply the above three requirements
prospectively from its date of transition to Ind AS. However,
if a first-time adopter restates any business combination that
was completed prior to its date of transition to comply with
Ind AS 103, it must also apply Ind AS 110, including these
requirements, from that date onwards.

Financial instruments
Ind AS accounting for financial instruments is complex and
requires exercise of significant judgment/estimate. In most
cases, Indian entities may not have collected necessary
information to apply Ind AS accounting retrospectively.
Collection of past data at the transition date also may not be
practical or involve the use of hindsight which is not allowed
under Ind AS 101. To address these challenges, Ind AS 101
specified voluntary exemptions and mandatory exceptions
related to financial instruments accounting.

Voluntary exemption: compound financial


instruments
Ind AS 32 recognizes the concept of compound financial
instruments, i.e., instruments containing both liability
and equity components. For example, a convertible bond
contains an obligation to pay interest and principal (a liability
component) and an embedded conversion option (an equity
component). Ind AS 32 requires an issuer to split a compound
financial instrument at inception into separate liability and
equity components. The measurement of two components is
determined based on circumstances existing at the date when
the instrument was first issued. The fair value of the liability
component, excluding the conversion option, is measured at
the fair value of expected cash flows at inception and recorded
as a liability. The residual amount of the issuance proceeds is
recorded in equity.
A first-time adopter is required to apply Ind AS 32
retrospectively and separate all compound financial
instruments into their debt and equity components. Under
that general principle, if the liability component of a compound
financial instrument is no longer outstanding at the date of
transition, retrospective application of Ind AS 32 will result in
two separate equity portions:- (1) a portion recorded in retained
earnings that represents cumulative interest accretion on the
liability component, and (2) the equity component initially
allocated at inception. Since retrospective application under
this situation will not affect total amount of equity recorded for
this instrument, Ind AS 101 provides an exemption whereby a
first-time adopter need not identify separately the two portions
of equity if liability component of the instrument is no longer
outstanding at the date of transition to Ind AS.

66 | Guide to First-time Adoption of Ind AS

Voluntary exemption: extinguishing financial


liabilities with equity instruments
Ind AS 32 recognizes the concept of compound financial
instruments, i.e., instruments containing both liability
and equity components. For example, a convertible bond
contains an obligation to pay interest and principal (a liability
component) and an embedded conversion option (an equity
component). Ind AS 32 requires an issuer to split a compound
financial instrument at inception into separate liability and
equity components. The measurement of two components is
determined based on circumstances existing at the date when
the instrument was first issued. The fair value of the liability
component, excluding the conversion option, is measured at
the fair value of expected cash flows at inception and recorded
as a liability. The residual amount of the issuance proceeds is
recorded in equity.
A first-time adopter is required to apply Ind AS 32
retrospectively and separate all compound financial
instruments into their debt and equity components. Under
that general principle, if the liability component of a compound
financial instrument is no longer outstanding at the date of
transition, retrospective application of Ind AS 32 will result in
two separate equity portions:- (1) a portion recorded in retained
earnings that represents cumulative interest accretion on the
liability component, and (2) the equity component initially
allocated at inception. Since retrospective application under
this situation will not affect total amount of equity recorded for
this instrument, Ind AS 101 provides an exemption whereby a
first-time adopter need not identify separately the two portions
of equity if liability component of the instrument is no longer
outstanding at the date of transition to Ind AS.

Exemptions/exceptions related to
classification of financial assets
Under Ind AS 109, all financial assets are classified into
three principal categories for measurement purposes. These
categories are amortized cost, fair value through other
comprehensive income (FVTOCI) and fair value through profit
or loss (FVTPL). Amortized cost measurement is applicable
only for debt instruments An entity may use FVTPL and
FVTOCI categories both for debt and equity instruments. The
classification depends on the following two criteria and options
elected by the entity:

Ind AS 109 requires an entity to decide classification of


financial assets on initial recognition, i.e., when it becomes
party to the terms of contract. It is allowed to change such
classification at a later date only in limited circumstances.

Voluntary exemptions
Considering practical difficulties in applying Ind AS 109
classification requirements retrospectively, Ind AS 101 contains
the following voluntary exemptions:
a) Designation of financial asset as measured at fair value
through profit or loss (FVTPL): In accordance with Ind AS
109, an entity may designate a financial asset, which is a
debt instrument and otherwise meets amortized cost or
FVTOCI criteria, as at FVTPL. However, such designation
is allowed only if doing so reduces or eliminates a
measurement or recognition inconsistency (commonly
referred to as accounting mismatch). Ind AS 109 also
requires that an entity should apply accounting mismatch
criteria and decide whether to apply FVTPL designation on
the date of initial recognition of the financial asset.
A first-time adopter is allowed to designate a financial
asset as at FVTPL on the basis of facts and circumstances
existing at the date of transition to Ind AS. An entity
exercising this exemption needs to make certain additional
disclosures, i.e., fair value of financial assets so designated
at the date of designation and their classification and
carrying amount in the previous financial statements.
b) Designation of investment in equity instruments: Ind AS
109 allows an entity to make an irrevocable election to
designate an investment in an equity instrument not held
for trading as at FVTOCI, instead of FVTPL. It requires
such election to be made on initial recognition and cannot
be changed subsequently. A first-time adopter is allowed
to designate an investment in such an equity instrument
as at FVTOCI on the basis of facts and circumstances that
existed at the date of transition to Ind AS.
To illustrate, consider that an entity, on the date of its
transition, is holding certain equity investments for
strategic purposes. The entity can designate these equity
investments as at FVTOCI, without looking at its intention
on the date it acquired these investments.

a) The entitys business model for managing the financial


assets, and
b) The contractual cash flow characteristics of the financial
asset.

Guide to First-time Adoption of Ind AS |

67

Mandatory exception
Ind AS 101 also contains the following mandatory exception
related to classification of financial assets.
In accordance with Ind AS 109, a financial asset which is a
debt instrument is measured at amortized cost if it meets two
tests, i.e.., business model test and SPPI test, at the date of its
initial recognition. A first-time adopter must assess whether
a financial asset meets these test on the basis of facts and
circumstances existing at the date of transition to Ind AS.
The SPPI test in Ind AS 109 is based on the premise that
contractual cash flows give the holder a return which is in
line with a basic lending arrangement. However, if the
terms of contract contain features which may modify the
time value of money, the SPPI test is not met requiring the
entity to measure the entire debt instrument as at FVTPL.
To make passing of the SPPI test easier, Ind AS 109 contains
certain operational simplifications. For example, Ind AS 109
states that (a) modified time value of money element and/or
(b) prepayment feature in a debt instrument do not fail the
SPPI test if their impact is insignificant at the time of initial
recognition of the financial asset.
Ind AS 101 states that if a first-time adopter is unable to
assess these particular aspects about the nature of cash flows
on the basis of facts and circumstances at the time of initial
recognition of the financial asset, it will lose the benefit of
operational simplification designed to make passing the SPPI
test easier. In other words, if these features are present in
the asset and information about facts and circumstances that
existed at the time of initial recognition of the financial asset is
not available, the first-time adopter will assume that SPPI test
has failed.

Exemptions related to classification of


financial liabilities
Under Ind AS 109, financial liabilities are classified either as
at FVTPL or amortized cost. Ind AS 109 requires an entity to
decide classification of financial liabilities on initial recognition.
No subsequent reclassification of financial liabilities is allowed.
Ind AS 101 contains the following exemptions pertaining to
classification of financial liabilities:
a) Designation of financial liability at fair value through
profit or loss: Ind AS 109 permits an entity to designate
a financial liability as at FVTPL if the prescribed criteria
are met at the time of initial recognition of the financial
liability. A first-time adopter is allowed to designate a
financial liability as at FVTPL provided the liability meets
Ind AS 109 criteria at the date of transition to Ind AS.
68 | Guide to First-time Adoption of Ind AS

b) Determination of an accounting mismatch for presenting a


gain or loss on financial liability: Ind AS 109 requires that
for financial liabilities designated as at FVTPL, changes in
the fair value attributable to own credit risk are recognized
in the OCI. However, if this requirement will create or
enlarge an accounting mismatch in profit or loss, the entity
should present all gains or losses on that liability (including
the effects of changes in credit risk for that liability) in
profit or loss. Ind AS 109 requires an entity to make
accounting mismatch assessment on the date it becomes
a party to the financial liability (i.e., on initial recognition).
Ind AS 101 allows a first-time adopter to make this
determination based on the facts and circumstances that
exist at the date of transition to Ind AS.

Mandatory exception: application of effective


interest rate
Ind AS 109 requires certain categories of financial assets and
liabilities to be measured at amortized cost using the effective
interest method. In accordance with Ind AS 109, effective
interest rate is the rate that exactly discounts estimated future
cash payments or receipts through the expected life of the
financial asset or financial liability to the gross carrying amount
of a financial asset or to the amortized cost of a financial
liability.
Ind AS 101 typically requires a first-time adopter to apply
the above requirement retrospectively, i.e., from the date of
initial recognition of the financial asset/liability. However, it
acknowledges that in some cases, a first time adopter may find
it impractical to apply the effective interest method in Ind AS
109 retrospectively. If this is the case, the fair value of financial
asset or the financial liability at the date of transition to Ind AS
is the new gross carrying amount of that financial asset or the
new amortized cost of that financial liability.
As stated above, Ind AS 8 lays down very strict criteria for
concluding whether it is impractical to apply a requirement of
Ind AS retrospectively. In accordance with Ind AS 8, applying
a requirement is impracticable when the entity cannot apply it
after making every reasonable effort to do so.

Voluntary exemption: fair value measurement


of financial assets or liabilities at initial
recognition
Ind AS 109 states that the fair value of a financial instrument
on initial recognition is normally the transaction price (i.e., the
fair value of the consideration given or received). However, if
an entity determines that the fair value at initial recognition
differs from the transaction price, Ind AS 109 contains specific
requirement with regard to accounting for the differences.
Specifically, Ind AS 109 requires that if the fair value is
evidenced by a quoted price in an active market for an identical
asset or liability (i.e., a level 1 input) or based on a valuation
technique which uses only data from observable markets, the
entity recognizes difference between the fair value at initial
recognition and the transaction price as a gain or loss in profit
or loss. In all other cases, the entity cannot recognize upfront
gain/losses.
Ind AS 101 provides a transition relief from the above
requirement. Consequently, a first-time adopter need not
apply the requirements of Ind AS 109 (in determining
whether recognition of day 1 gain/loss is appropriate) to the
transactions entered into before the date of transition to Ind
AS.

Voluntary exemption: designation of contracts


to buy or sell a non-financial item
Ind AS 109 contains specific guidance for contracts to buy
or sell a non-financial item that can be settled net in cash
or another financial instrument, or by exchanging financial
instruments. It requires such contracts to be accounted for as
derivatives. However, Ind AS 109 scopes out contracts which
are entered into and continue to be held for receipt or delivery
of a non-financial item in accordance with the entitys expected
purchase, sale or usage requirements. Contracts scoped out
from Ind AS 109 are treated as executory contracts under Ind
AS 37 Provisions, Contingent Liabilities and Contingent Assets.
Notwithstanding the above, Ind AS 109 states that if an entity
elects to designate a scoped out contract as at fair value
through profit or loss (FVTPL), Ind AS 109 will apply to those
contracts and they will be treated as derivative. Ind AS 109
permits FVTPL designation for the scoped out contracts only
at the time of initial recognition and only if FVTPL designation
eliminates or significantly reduces a recognition inconsistency
(accounting mismatch) that would otherwise arise.

For contracts that were previously entered into and are


outstanding at the date of transition to Ind AS, Ind AS 101 gives
a voluntary exemption whereby a first-time adopter can make
FVTPL designation as at the date of its transition to Ind AS.
However, such designation is allowed only if the contracts meet
the requirements of Ind AS 109 at that date and the entity
designates all similar contracts.

Mandatory exception: impairment of


financial assets
Ind AS 109 introduces a new expected credit loss model
for impairment of financial assets. Ind AS 101 requires a
first-time adopter to apply impairment requirements of Ind
AS 109 retrospectively. However, it gives certain operational
simplifications in applying these requirements. On transition to
Ind AS, a first time adopter is required to approximate the credit
risk on initial recognition of the financial instrument (or, for loan
commitments and financial guarantee contracts, the date that
the entity became a party to the irrevocable commitment), by
considering all reasonable and supportable information that is
available without undue cost or effort. The entity will compare
credit risk so identified on initial recognition to the credit risk
at the date of transition to Ind AS for determining whether 12month ECL or lifetime ECL should be used.
If, at the date of transition to Ind AS, an entity is unable to
determine whether there have been significant increases
in credit risk since initial recognition without undue cost or
effort, then the entity must recognize a loss allowance based
on lifetime ECL at each reporting date until the financial
instrument is derecognized.

Mandatory exception: derecognition of


financial assets and liabilities
Ind AS 109 deals with derecognition of financial assets and
financial liabilities in a comprehensive manner. Ind AS 109
derecognition rules for financial assets are extremely complex.
The decision whether a transfer qualifies for derecognition
is made by applying a combination of risk and rewards and
control tests. The use of two models often create confusion
however, those have been addressed by ensuring that the risk
and rewards test is applied first, with the control test used only
when the entity has neither transferred substantially all risks
and rewards of the asset nor retained them. Derecognition
cannot be achieved by only a legal transfer. The transfer has
to happen in substance which is evaluated by using a risk and
rewards and a control model. A legal opinion from a qualified
attorney is normally required to conclude on highly
complex matters.

Guide to First-time Adoption of Ind AS |

69

Due to the application of Ind AS 109 derecognition


requirements, an entity may not be able to derecognize
financial assets transferred under the arrangements, such as,
bill discounting and/or factoring of trade receivables, in entirety,
if it has provided credit enhancement to the transferor. Rather,
based on the specific facts, the entity will evaluate whether it
should treat the transfer as a financing transaction (i.e., debt)
or continuing involvement approach will apply which requires
the entity to continue recognizing the transferred asset to the
extent of its continuing involvement.
A first-time adopter may not have collected the requisite
information to apply Ind AS 109 requirement to transfer of
financial assets/liabilities which has taken place before the
transition date. Ind AS 101 requires a first-time adopter to
apply derecognition requirements in Ind AS 109 prospectively
to transactions occurring on or after the date of transition to
Ind AS. For example, if a first-time adopter derecognized nonderivative financial assets or non-derivative financial liabilities
under its previous GAAP as a result of a transaction that
occurred before the date of transition to Ind AS, the entity does
not recognize those assets or liabilities under Ind AS unless
they qualify for recognition as a result of a later transaction or
event. However, a first-time adopter may apply derecognition
requirements retrospectively from a date of the entitys
choosing provided that the information needed to apply Ind AS
109 to financial assets and financial liabilities derecognized as
a result of past transactions was obtained at the time of initially
accounting for those transactions. This is likely to prevent many
first-time adopters from restating transactions that occurred
before the date of transition to Ind AS.

Mandatory exception: embedded derivatives


Ind AS 109 does not permit embedded derivatives to
be separated from host contracts that are financial
assets. Rather, an entity applies Ind AS 109 classification
requirements to the entire hybrid contract. In case of all other
contracts, Ind AS 109 requires that an embedded derivative
should be separated from the host contract and accounted for
as a derivative if, and only if:
a) The economic characteristics and risks of the embedded
derivative are not closely related to the economic
characteristics and risks of the host contract,
b) A separate instrument with the same terms as the
embedded derivative would meet the definition of a
derivative, and

70 | Guide to First-time Adoption of Ind AS

c) The hybrid (combined) instrument is not measured at


fair value with changes in fair value recognized in the
statement of profit and loss (i.e., a derivative that is
embedded in a financial liability at fair value through profit
or loss is not separated).
Ind AS 101 requires a first-time adopter to assess whether
an embedded derivative should be separated from the host
contract and accounted for as a derivative based on conditions
that existed at the later of the date it first became a party to
the contract and the date a reassessment is required by Ind
AS 109. Ind AS 109 requires subsequent reassessment of
embedded derivatives only if there is a change in the terms
of the contract that significantly modifies the cash flows that
otherwise would be required under the contract. Hence, unless
there is any such modification in the contract, a first-time
adopter needs to make embedded derivative assessment based
on conditions existing on the date it first became a party to the
contract.

Mandatory exception: hedge accounting


Under Indian GAAP, there is no mandatory standard that deals
comprehensively with derivative and hedge accounting. The
ICAI has recently issue the Guidance Note on Accounting for
Derivative Contracts. The said Guidance Note will be applicable
from financial year beginning on or after 1 April 2016. The
absence of comprehensive guidance on hedge accounting has
resulted in the adoption of varying practices.
a) Loss on derivative contracts is recognized; while the gain,
if any, is ignored. For this purpose, an entity may compute
gain/loss on an individual instrument basis or on a portfolio
basis.
b) Gain/loss on derivative contract is offset against the loss/
gain on the underlying hedged item and net loss, if any, is
recognized in P&L. For example, entities may recognize net
loss on forward exchange contracts after offsetting gain on
the hedged highly probable forecast sale transaction.
c) Accounting for derivative contracts is subsumed in
accounting for the underlying hedged item. For example,
entities may treat floating rate loan and interest rate swap
entered to hedge the cash flow risk of the loan together
and, therefore, recognize interest on the loan at fixed rate.
Any further gain/loss on the swap are not recognized.

d) Some entities have applied hedge accounting principles


of AS 30 Financial Instruments: Recognition and
Measurement, without adopting AS 30 in entirety. For
instance, entities may recognize gains/losses on derivative
instruments undertaken to hedge cash flow risk in a
hedging reserve account, without complying with strict
hedge documentation requirements.
In accordance with Ind AS 109, all derivatives are measured
at fair value, and any gains/losses, except those on derivatives
used for hedge purposes, are recognized in profit or loss. Ind AS
109 deals with hedge accounting in a comprehensive manner. It
defines three types of hedging relationships, namely, fair value
hedges, cash flow hedges and hedges of net investments in a
foreign operation. It also lays down prerequisite conditions to
apply hedge accounting.

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71

Ind AS 101 requires that a first time adopter should measure all
derivatives at fair value on transition to Ind AS. Moreover, the
entity is required to eliminate deferred gains and losses arising
on derivatives that were reported in accordance with previous
GAAP as if they were assets or liabilities. The recognition
of resulting gain/loss is determined in accordance with the
mandatory exception laid down in Ind AS 101. The flowchart
presentation of the exception is as follows :

The application of the hedge accounting exception in some


typical Indian scenarios is explained below with the help of
simple examples. These scenarios do not consider the impact of
the Guidance Note on Accounting for Derivative Contracts since
it is not mandatory yet.

Hedge relationship which still exists


was designated under previous GAAP
before date of transition to Ind AS?

Yes

No

Is the hedge relationship of a


TYPE that qualies for
hedge accounting under
Ind AS 109?

Hedge is not reected in the


opening Ind AS balance sheet.

Yes

No
Did the entity designate a net
position as a hedged item in
accordance with previous GAAP

On transition
Fair value hedge
Cash ow hedge
If hedging instrument is no
longer outstanding, there is no
requirement to restate when
under previous GAAP its result
has been recognized in P&L
and not deferred.

No

Hedge is not reected in


the opening Ind AS
balance sheet

After transition
Are the CONDITIONS for hedge
accounting in Ind AS 109 met?

Yes
Follow specic hedge
accounting guidance in
Ind AS 109

72 | Guide to First-time Adoption of Ind AS

No

Apply Ind AS 109 to prospectively


discontinue hedge accounting

Yes

Entity may designate on or before


the date of transition to Ind AS an
individual item within the net
position as a hedged item or a net
position that meets requirements in
Ind AS 109
Follow specic guidance for cash
ow or fair value hedges on
transition and subsequently

Example 7: Cash flow hedge of highly probable foreign currency sale


FTA Limited expects to make foreign currency sale of US$3,000,000 on 31 December 2015. The functional currency
of FTA is INR. On 1 January 2014, FTA determines that sale is highly
probable and it enters into a forward contract to hedge the foreign currency risk. According to the terms of the
forward contract, FTA will pay US$3,000,000 on 31 December 2015 and receive INR @ INR 65 per US$. FTAs date
of transition to Ind AS is 1 April 2015.
How should FTA treat derivative contract in its Ind AS opening balance sheet? Consider the following scenarios:
(i)

FTA recognizes mark-to-market loss on derivative in its profit or loss, without considering offsetting gain on the
hedged item. At the transition date, there is a cumulative gain on the hedged item, which is not recognized on
consideration of prudence.

(ii) FTA recognizes mark-to-market gain/loss on the forward contract in the Cash Flow Hedge Reserve. However, it has
not maintained detailed hedge documentation.
(iii) FTA has identified hedge relationship under Indian GAAP and it does not recognize gain/loss on the forward
contract since the same will be offset by loss/gain on the hedged item. At the date of transition to Ind AS, the
hedged item is still expected to occur.
(iv) FTA has identified hedge relationship under Indian GAAP and it does not recognize gain/loss on the forward
contract since the same will be offset by loss/gain on the hedged item. At the transition date, the hedged item is
not expected to occur.
In the first scenario, FTA has not identified hedge relationship under Indian GAAP. On the transition date, it will measure the
forward contract at its fair value and recognize resulting gain in the opening retained earnings. Hence, there is no change in
Indian GAAP accounting going forward also, except that FTA will also start recognizing gains immediately.
In the second scenario, though FTA has not maintained detailed hedge documentation, it has identified hedge relationship
under Indian GAAP. Moreover, the relationship is an eligible hedge relationship under Ind AS 109. Hence, in its opening
Ind AS balance sheet, FTA will recognize gain/loss on the forward contract, arising before the date of transition to Ind AS,
in the Cash Flow Hedge Reserve. FTA will reclassify this amount to P&L when the hedged item (i.e.., foreign currency sale)
impacts the profit or loss. Ind AS 101 is clear that after the date of transition to Ind AS, hedge accounting can be applied
prospectively only from the date the hedge relationship is fully designated and documented in accordance with Ind AS 109
requirements. Hence, if FTA wishes to continue applying hedge accounting after the date of transition to Ind AS, it must
complete designation and documentation of the hedge relationship on or before that date. FTA must also comply with
ongoing requirements related to hedge effectiveness, etc. If FTA does not comply with hedge accounting requirements of
Ind AS 109, it will compute fair value of the derivative contract at each reporting date and recognize gain/loss in profit or
loss immediately. However, the gain or loss in the cash flow hedge reserve as of the date of transition will continue to be
shown there and can be reclassified to P&L only when the hedged transaction occurs.
In third scenario, the same analysis as the second scenario applies both regard to accounting at the transition date as well
as accounting after the transition date. Consequently, FTA will recognize gain/- loss on the forward contract, arising on or
before the transition date, in the Cash Flow Hedge Reserve in its opening Ind AS balance sheet. Like the second scenario,
subsequent accounting also depends on whether FTA complies with Ind AS 109 hedge requirements.
In the fourth scenario, the hedged item is no longer expected to occur. Hence, it is a relationship of the type that does not
qualify for hedge accounting under Ind AS 109. Consequently, FTA should not reflect this hedging relationship in its opening
Ind AS balance sheet. Rather, FTA will recognize fair value gain/loss arising on the forward contract in the opening retained
earnings. Going forward, assume that FTA does not comply with hedge accounting requirements of Ind AS 109. Hence, FTA
will fair value the derivative contract at each reporting date and recognize gain/loss in profit or loss immediately.

Guide to First-time Adoption of Ind AS |

73

Example 8: Cash flow hedge of interest


rate risk

Example 9: Fair value hedge of


inventory

In 2009, FTA Limited borrowed US$10 million from a


bank. The terms of the loan provide that a coupon of 3
month LIBOR plus 2% is payable quarterly in arrears and
the principal is repayable in 2024. In 2012, FTA decided
to fix its coupon payments for the remainder of the
term of the loan by entering into a twelve-year payfixed, receive-floating interest rate swap. The swap has
a notional amount of US$10 million and the floating leg
resets quarterly based on 3 month LIBOR.

On 15 November 2014, FTA Limited entered into


a forward contract to sell 50,000 barrels of crude
oil to hedge all changes in the fair value of certain
inventory. FTA will apply Ind AS 109 from 1 April
2015, its date of transition to Ind AS. The historical
cost of the forward contract is nil and at the date of
transition the forward contract had a negative fair
value of US$50.

In FTAs last financial statements prepared under Indian


GAAP, the swap was clearly identified as a hedging
instrument in a hedge of the loan and was accounted for
as such. The fair value of the swap was not recognized
in the balance sheet and periodic interest settlements
were accrued and recognized as an adjustment to the
loan interest expense. On 1 April 2015, FTAs date of
transition to Ind AS, the loan and the swap were still
in place and the swap had a positive fair value of US$1
million and a nil carrying amount. In addition, FTA met
all the conditions in Ind AS 109 to permit the use of
hedge accounting for this arrangement throughout
years ended 31 March 2016 and 2017.
In its opening Ind AS balance sheet, FTA should:
In its opening Ind AS balance sheet, FTA should:

In FTAs final financial statements prepared under


Indian GAAP, the forward contract was clearly
identified as a hedging instrument as a hedge of
the inventory. FTA has not recognized the forward
contract liability in its Indian GAAP balance sheet
since the loss was offset by a corresponding gain
on the inventory. Due to the requirements of AS 2
Valuation of Inventories, FTA has also not recognized
unrealized gain on inventory in its Indian GAAP
balance sheet. FTA met all the conditions in Ind AS
109 to permit the use of hedge accounting for this
arrangement until the forward expired.
In its opening Ind AS balance sheet, FTA should:

Recognize the interest rate swap as an asset at its fair


value of USD 1 million, and
Credit US$1 million to the Cash Flow Hedge Reserve,
to be reclassified to profit or loss as the hedged
transactions (future interest payments on the loan)
affect profit or loss.

In addition, hedge accounting will be applied throughout


the years ended 31 March 2016 and 2017.

74 | Guide to First-time Adoption of Ind AS

Recognize the forward contract as a liability at its


fair value of US$50,
Recognize the crude oil inventory at its historical
cost plus lower of the change in fair value of
the crude oil inventory and that of the forward
contract, and
Record the net adjustment in the opening
retained earnings.

In addition, hedge accounting will be applied until the


forward expired.

Mandatory exception: government loans


In many developing countries, the government provides
interest free loan or loans carrying interest at below market
rate to entities so as to promote economic development. For
example, in India, many state governments provide sales tax
deferral scheme to encourage and ensure development of
underdeveloped areas.
Under Indian GAAP, AS 12 Accounting for Government Grants
does not specifically deal with accounting for government
loan at nil or below-market rate of interest. However, AS
29 Provisions, Contingent Liabilities and Contingent Assets
prohibits discounting of sales tax deferral or any other
concessional loan given by the government. Hence, under
Indian GAAP, government loans at nil or concessional rate are
recognized at nominal value.
Ind AS 20 Accounting for Government Grants and Disclosure of
Government Assistance requires the benefit of a government
loan at nil or below-market rate of interest to be treated
as a government grant. On initial recognition, the loan is
measured at its fair value determined in accordance with Ind
AS 109. The difference between the initial fair value of the
loan and the proceeds received is a government grant to be
recognized in accordance with Ind AS 20. Going forward, the
loan is measured at amortized cost using the effective interest
method.
Ind AS 101 contains a mandatory exception with regard to
government loans. In accordance with the exception, a firsttime adopter should classify government loan received as a
financial liability or an equity instrument in accordance with
the principles of Ind AS 32. A first-time adopter will apply
the requirements in Ind AS 109 prospectively to government
loans existing at the date of transition to Ind AS. Hence, a
first-time adopter will not recognize the corresponding benefit
of the government loan at a below-market rate of interest as
a government grant. If a first-time adopter, under its previous
GAAP, did not recognize and measure a government loan at
a below-market rate of interest on a basis consistent with Ind
AS requirements, it needs to use its previous GAAP carrying
amount of the loan at the date of transition as the carrying
amount of the loan in the opening Ind AS balance sheet. It will
apply Ind AS 109 to the measurement of such loans after the
date of transition to Ind AS. To do so, the entity calculates the
effective interest rate by comparing the carrying amount of the
loan at the date of transition to Ind AS with the amount and
timing of expected repayments to the government. If the loan is
repayable at the carrying amount appearing in the opening Ind
AS balance sheet, no interest will be recognized on the loan.

However, an entity may apply the requirements in Ind AS


109 and Ind AS 20 retrospectively to any government loan
originated before the date of transition, provided that the
information needed to do so had been obtained when it first
accounted for the loan under previous GAAP.

Example 10: Government loan with


below-market interest rate
FTA Limiteds date of transition to Ind AS is 1 April
2015. In 2011, FTA had received a loan of INR1 million
at a below-market rate of interest from the government.
Under its previous GAAP, FTA accounted for the loan as
a liability without discounting the same and its carrying
amount at the transition date was INR1 million. The
amount repayable at 1 April 2018 is INR1 million.
No other payment is required under the terms of the
loan and there are no future performance conditions
attached to it. The information needed to measure the
fair value of the loan was not obtained at the time it was
initially accounted for.
The loan meets the definition of a financial liability in
accordance with Ind AS 32. FTA therefore continues to
classify it as a liability. It also uses the previous GAAP
carrying amount of the loan at the date of transition
as the carrying amount of the loan in the opening Ind
AS balance sheet. Since the loan does not carry any
interest and is repayable at the amount recognized in
the opening balance sheet, interest does not need to be
recognized on the loan.

Guide to First-time Adoption of Ind AS |

75

Other miscellaneous
exemptions and
exceptions
Mandatory exception
Estimates
In preparing the opening Ind AS balance sheet and comparative
information in its first Ind AS financial statements, a first-time
adopter may have received new information about estimates
that it made for the same dates under previous GAAP. Ind AS
contains a mandatory exception which will not allow the use of
such new/additional information to change the previous GAAP
estimates. Ind AS 101 requires an entity to use estimates
under Ind AS that are consistent with the estimates made for
the same date under its previous GAAP after adjusting for
any difference in accounting policy unless there is objective
evidence that those estimates were in error.
Under Ind AS 101, an entity cannot apply hindsight and make
better estimates when it prepares its first Ind AS financial
statements. This also means that an entity is not allowed to
consider subsequent events that provide evidence of conditions
that existed at that date, but that came to light after the date its
previous GAAP financial statements were finalized.
An entity may receive information after the date of transition
to Ind AS about estimates that it had made under previous
GAAP. The entity should treat the receipt of such information
as non-adjusting event, in accordance with Ind AS 10 Events
after the Reporting Period. For example, assume that an entitys
date of transition to Ind AS is 1 April 2015 and new information
on 15 July 2015 requires the revision of an estimate made
in accordance with previous GAAP as at 31 March 2015. The
entity should not reflect that new information in its opening
Ind AS Balance Sheet (unless the estimates need adjustment
for any differences in accounting policies or there is objective
evidence that the estimates were in error). Instead, the entity
should reflect that new information in profit or loss (or, if
appropriate, other comprehensive income) for the year ended
31 March 2016.

76 | Guide to First-time Adoption of Ind AS

When an entity needs to make estimates under Ind AS at the


date of transition to Ind AS that were not required under its
previous GAAP, those estimates should be consistent with
Ind AS 10 and reflect conditions that existed at the date of
transition to Ind AS. This means, for example, that estimates of
market prices, interest rates or foreign exchange rates should
reflect market conditions at the date of transition to Ind AS.
The following chart summarizes Ind AS 101 requirements
relating to estimates:
Did the entity make
estimate under its
previous GAAP?

No

Yes
Is there objective
evidence that the
estimate was an error?

Yes

Make estimate
reecting conditions
at the relevant date*

Yes

Use previous
GAAP estimate

No
Did the entity used
accounting policy
consistent with Ind-AS?
No
Adjust previous estimate
to reect differences in
accounting policies
*The relevant date is the date to which the estimate relates.

The above provisions also apply to a comparative period


presented in an entitys first Ind AS financial statements, in
which case the references to the date of transition to Ind AS are
replaced by references to the end of that comparative period.

Example 11: Application of Ind AS 101 to


estimates
Background
FTA Limited accounted for inventories at the lower of
cost and net realizable value under Indian GAAP. Entity
As accounting policy is consistent with the requirements
of Ind AS 2 Inventories. Under Indian GAAP, the goods
were accounted for at a price of INR1.25 per kg. Due to
changes in market circumstances, FTA ultimately could
only sell the goods in the following period for INR 0.90
per kg.

Application of the requirements


Assuming that FTAs estimate of the net realizable
value was not in error, it will account for the goods at
INR1.25 per kg upon transition to Ind AS and will make
no adjustments because the estimate was not in error
and its accounting policy was consistent with Ind AS.
The effect of selling the goods for INR0.90 per kg will be
reflected in the period in which they were sold.

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77

Voluntary exemptions
Share-based payments
Under Indian GAAP, the Guidance Note on Accounting For
Employee Share-based Payments permits an entity to use the
intrinsic value method as an alternate to the fair value method
for measuring an employee share-based payment. On transition
to Ind AS, all entities need to measure share-based payment
transactions using the fair value method only.
Under Ind AS 101, there is no exemption from recognizing
share-based payment transactions that have not yet vested
at the date of transition to Ind AS. The voluntary exemptions
in Ind AS 101 clarify that a first-time adopter is encouraged,
but not required, to apply Ind AS 102 to equity instruments
that vested before date of transition to Ind AS. However, if a
first-time adopter elects to apply Ind AS 102 to such equity
instruments, it may do so only if the entity has disclosed
publicly the fair value of those equity instruments, determined
at the measurement date, as defined in Ind AS 102.
Ind AS 101 requires that for all grants of equity instruments to
which Ind AS 102 has not been applied (e.g., equity instruments
vested but not settled before date of transition to Ind AS), a
first-time adopter must still make the principal disclosures
relating to the nature and extent of share-based payments
required by paragraphs 44 and 45 of Ind AS 102.
If a first-time adopter modifies the terms or conditions of a
grant of equity instruments to which Ind AS 102 has not been
applied, the entity is not required to apply paragraphs 2629
of Ind AS 102 if the modification occurred before the date of
transition to Ind AS.
A first-time adopter is encouraged, but not required, to apply
Ind AS 102 to liabilities arising from share-based payment
transactions that were settled before the date of transition to
Ind AS.

Long-term foreign currency monetary items


Under Indian GAAP, AS 11 The Effects of Changes in Foreign
Exchange Rates gives two options with regard to accounting
for exchange differences. The first option is that an entity
recognizes exchange differences as income or expense in
profit or loss in the period in which they arise. However, AS 11
provides companies an option to defer/-capitalize exchange
differences arising on long-term foreign currency monetary
items. The option once selected is irrevocable and needs to
be applied to all long-term foreign currency monetary items.
A long-term foreign currency monetary item is an item with a
term of 12 months or more at the date of its origination.
Ind AS 21 The Effects of Changes in Foreign Exchange
Rates requires exchange differences arising on translation/settlement of all foreign monetary items, including long-term
foreign currency monetary items, to be recognized as income
or expense in profit or loss in the period in which they arise. Ind
AS 21 does not give any deferral/capitalization option.
Notwithstanding the above, Ind AS 101 contains a voluntary
exemption whereby companies which have adopted deferral/
capitalization accounting under AS 11 can continue to use
deferral/amortization policy for exchange differences arising
on translation of long-term foreign currency monetary items
recognized in the financial statements for the period ending
immediately before the beginning of the first Ind AS financial
reporting period4. It should be noted that this is an option. In
other words, a company is free to use Ind AS 21 accounting
even for exchange differences arising on translation of
long-term foreign currency monetary items recognized in
financial statements for the period ending immediately before
the beginning of the first Ind AS financial reporting period.
However, the deferral/amortization policy is not allowed for any
new long-term foreign currency monetary item recognized from
the first Ind AS financial reporting period.
Consider that a company will apply Ind AS for the first time in
its financial statements for the year ended 31 March 2017.
Its date of transition is 1 April 2015 and its last Indian GAAP
financial statements were prepared for the year ended 31
March 2016. For any long-term foreign currency monetary
items recognized on or before 31 March 2016, the company
has option of continuing deferral/amortization of exchange
differences. For any long-term foreign currency monetary item
recognized on or after 1 April 2016, deferral/amortization of
exchange difference will not be allowed. Rather, the company
will apply Ind AS 21 for recognition of gains and losses.

4 Please also refer the booklet titled IFRS-converged Indian Accounting Standards Outreach meeting dated 15 January 2015, published by the Accounting Standards
Board of the ICAI.
78 | Guide to First-time Adoption of Ind AS

This exemption does not exist under IASB IFRS. Hence, if an


entity decides to use this exemption, it will depart from IASB
IFRS.

Stripping costs in the production phase of a


surface mine
In surface mining operations, entities may find it necessary to
remove mine waste materials (overburden) to gain access
to mineral ore deposits. This waste removal activity is known
as stripping. A mining entity may continue to remove
overburden and to incur stripping costs during the production
phase of the mine. Appendix B to Ind AS 16 Stripping Costs
in the Production Phase of a Surface Mine considers when
and how to account separately for the benefits arising from a
surface mine stripping activity, as well as how to measure these
benefits both on initial recognition and subsequently.
A first-time adopter may apply the Appendix B to Ind AS 16
from the date of transition to Ind AS. As at transition date to
Ind AS, any previously recognized asset balance that resulted
from stripping activity undertaken during the production phase
(predecessor stripping asset) is reclassified as part of an
existing asset to which the stripping activity related, to the
extent that there remains an identifiable component of the
ore body with which the predecessor stripping asset can be
associated. Such balances are depreciated or amortized over
the remaining expected useful life of the identified component
of the ore body to which each predecessor stripping asset
balance relates. If there is no identifiable component of the ore
body to which that predecessor stripping asset relates, it should
be recognized in the opening retained earnings at the transition
date to Ind AS.

Non-current assets held for sale and discontinued


operations
Ind AS 105 Non-current Assets Held for Sale and Discontinued
Operations requires that non-current assets (or disposal
groups) that meet criteria to be classified as held for sale or
for distribution should be carried at the lower of its carrying
amount and fair value less cost to sell on the initial date of such
identification. Ind AS 105 also requires that a non-current asset
classified as held for sale or forming part of disposal group
should not be depreciated, if its measurement is covered within
the scope of Ind AS 105.

Ind AS 101 contains a voluntary exemption whereby a first time


adopter can:
a) Measure such assets or operations at the lower of carrying
value and fair value less cost to sell at the date of transition
to Ind AS in accordance with Ind AS 105, and
b) Recognize directly in retained earnings any difference
between that amount and the carrying amount of those
assets at the date of transition to Ind AS determined under
the entitys previous GAAP.
One of the consequences of this exemption is that the first
time adopter will not be required to reverse depreciation/
amortization charged under the previous GAAP on non-current
assets, which meets the criteria for classification as held for
sale on the date of transition to Ind AS.
This exemption does not exist under IASB IFRS. Hence, if an
entity decides to use this exemption, it will depart from IASB
IFRS.

Deemed cost for oil and gas assets


It is a common practice under some country GAAPs, including
Indian GAAP, to measure Exploration &Evaluation assets, using
the full cost accounting method. However, this method is not
consistent with Ind AS. Applying Ind AS retrospectively would
pose significant problems for first-time adopters because it
will also require amortization to be calculated (on a unit of
production basis) for each year, using a reserves base that
has changed over time because of changes in factors such as
geological understanding and prices for oil and gas. In many
cases, this information may not be available.
Ind AS 101 therefore grants voluntary exemption for first time
adopters. A first-time adopter using such accounting under
previous GAAP may elect to measure oil and gas assets at the
date of transition to Ind AS on the following basis:
a) Exploration and evaluation assets at the amount
determined under the entitys previous GAAP, and
b) Assets in the development or production phases at the
amount determined for the cost center under the entitys
previous GAAP. The entity should allocate this amount to
the cost centers underlying assets pro rata using reserve
volumes or reserve values as of that date.

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79

To avoid the use of deemed costs resulting in an oil and gas


asset being measured at more than its recoverable amount, the
entity should test exploration and evaluation assets and assets
in the development and production phases for impairment at
the date of transition to Ind AS. The deemed cost amounts
should be reduced to take account of any impairment charge, if
any.

Deemed cost for assets used in operations subject to


rate regulation
Some entities hold items of property, plant and equipment or
intangible assets that are used, or were previously used, in
operations subject to rate regulation. The carrying amount
of such items may include amounts that were determined
under previous GAAP but do not qualify for capitalization in
accordance with Ind AS. If this is the case, a first-time adopter
may elect to use the previous GAAP carrying amount of such an
item at the date of transition to Ind ASs as deemed cost.
If an entity applies this exemption to an item, it need not apply
it to all items. At the date of transition to Ind AS, an entity
should test for impairment in accordance with Ind AS 36 each
item for which this exemption is used.

Presentation and
disclosures
An entitys first Ind AS financial statements should include at
least three balance sheets, two statements of profit and loss,
two statements of cash flows and two statements of changes in
equity and related notes.
The first Ind AS financial statements should be presented in
accordance with the presentation and disclosure requirements
in Ind AS 1 Presentation of Financial Statements and other Ind
AS standards. In addition, the presentation and disclosures
in the financial statements should also comply with Schedule
III of the Companies Act, 2013. Ind AS 101 does not provide
exemptions from presentation and disclosure requirements in
other Ind AS.

Explanation of transition to Ind AS


A first-time adopter should explain how the transition from
Indian GAAP to Ind AS affected its reported financial position,
financial performance and cash flows. These disclosures are
required because they help users understand the effect and
implications of the transition to Ind AS and how they need
to change their analytical models to make the best use of
information presented using Ind AS.
To comply with the above requirement, a first-time adopter is
required to present:

Reconciliations of its equity reported under the previous


GAAP to its equity under Ind AS at:

80 | Guide to First-time Adoption of Ind AS

The date of transition to Ind AS, and


The end of the latest period presented in the entitys
most recent annual financial statements under the
previous GAAP.

A reconciliation to its total comprehensive income under


Ind AS for the latest period in the entitys most recent
annual financial statements. The starting point for that
reconciliation should be total comprehensive income under
the previous GAAP for the same period, or if an entity did
not report such a total, profit or loss under the previous
GAAP.

Reconciliations to be presented in first Ind AS financial statements


FTA Limiteds date of transition to Ind AS is 1 April 2015 and its reporting date is 31 March 2017. It should present the primary
financial statements and reconciliations in its first Ind AS financial statements.
1 April 2015

31 March 2016

31March 2017

Balance sheet under Ind AS

Yes

Yes

Yes

Reconciliation of equity to Indian GAAP

Yes

Yes

No

Statement of total comprehensive income

NA

Yes

Yes

Cash flow statement

NA

Yes

Yes

Statement of changes in equity

NA

Yes

Yes

Reconciliation of total comprehensive income to


Indian GAAP

NA

Yes

No

Explanation of material adjustments to cash flow


statement prepared under Indian GAAP

NA

Yes

No

For the period ending under Ind AS

An explanation of the material adjustments to the cash


flow statement, if it presented one under its previous
GAAP.

An explanation of the material adjustments to the cash


flow statement, if it presented one under its previous
GAAP.

The reconciliations should give sufficient detail to enable


users to understand material adjustments to the balance
sheet and statement of comprehensive income. If an entity
becomes aware of errors made under the previous GAAP, the
reconciliations should distinguish the correction of those errors
from changes in accounting policies.
These reconciliations are illustrated in Appendix 1 to this guide.

Other disclosures
If applicable, the first Ind AS financial statements should also
disclose:

If a first-time adopter has recognized or reversed any


impairment losses in preparing its opening Ind AS balance
sheet, the entitys first Ind AS financial statements should
make disclosures that Ind AS 36 Impairment of Assets
would have required if the entity had recognized those
impairment losses or reversals in the period beginning with
the date of transition to Ind AS.
If fair value is used as deemed cost for property, plant and
equipment or intangible assets or investment property, the
aggregate fair values and the aggregate adjustment to the
previous carrying amounts should be disclosed for each
line item.

A first time adopter to Ind AS may elect to continue with


the carrying value for all of its PPE/intangible assets/
investment property as recognized in financial statements
as at the date of transition to Ind AS, measured according
to the previous GAAP and use that as its deemed cost as
the date of transition after making necessary adjustments
with respect to decommissioning liabilities. If this election
is made, the fact and the accounting policy should be
disclosed by the entity until such time that those items of
PPE, investment properties or intangible assets, as the
case may be, are significantly depreciated, impaired or
derecognized from the entitys balance sheet.
An entity that applies the optional exemption to classify a
financial asset or financial liability as at fair value through
profit or loss must disclose:

The fair value of the item,

The carrying amount under the previous GAAP, and

The classification under the previous GAAP

If an entity uses a deemed cost in its opening Ind AS


balance sheet for an investment in a subsidiary, joint
venture or associate in its separate financial statements,
the entitys first Ind AS separate financial statements
should disclose:

The aggregate deemed cost of those investments for


which deemed cost is their previous GAAP carrying
amount
The aggregate deemed cost of those investments for
which deemed cost is fair value, and

Guide to First-time Adoption of Ind AS |

81

The aggregate adjustment to the carrying amounts


reported under previous GAAP.

If an entity uses the exemption for oil and gas assets, it


should disclose that fact and the basis on which carrying
amounts determined under previous GAAP were allocated.
If an entity uses the exemption for operations subject to
rate regulation, it should disclose that fact and the basis on
which carrying amounts were determined under previous
GAAP.
If an entity elects to measure assets and liabilities at
fair value and to use that fair value as the deemed cost
in its opening Ind AS balance sheet because of severe
hyperinflation, the entitys first Ind AS financial statements
should disclose an explanation of how, and why, the entity
had, and then ceased to have, a functional currency that
has both of the following characteristics a reliable general
price index is not available to all entities with transactions
and balances in the currency and exchangeability
between the currency and a relatively stable foreign
currency does not exist.

Non-Ind AS comparative information and


historical summaries
Normally Ind AS requires comparative information that is
prepared on the same basis as information relating to the
current reporting period. However, if an entity presents
historical summaries of selected data for periods before the
first period for which they present full comparative information
under Ind AS, the standard does not require such summaries to
comply with the recognition and measurement requirements of
Ind AS.
Furthermore, some entities present comparative information
in accordance with previous GAAP as well as the comparative
information required by Ind AS 1. In any financial statements
containing historical summaries or comparative information in
accordance with previous GAAP, an entity should:
a) Label the previous GAAP information prominently as not
being prepared in accordance with Ind AS; and
b) Disclose the nature of the main adjustments that would
make it comply with Ind AS. An entity need not quantify
those adjustments.

82 | Guide to First-time Adoption of Ind AS

Interim financial reports


An entity that presents its first Ind AS financial statements
is a first-time adopter and should apply Ind AS 101 in the
preparation of those financial statements. It should also apply
Ind AS 101 in each interim report prepared under Ind AS 34
Interim Financial Reporting for part of a period covered by
its first Ind AS financial statements. For a company with a 31
March year end, this will mean that if Ind AS 34 is adopted for
quarterly reporting, the first financial information prepared
under Ind AS will be at 30 June 2016 and the company will
need to apply Ind AS 101 in the preparation of that quarterly
report. Moreover, comparable quarter, i.e., 30 June 2015
numbers will also have to be Ind AS compliant.
If a first-time adopter presents an interim financial report under
Ind AS 34 for part of the period covered by its first Ind AS
financial statements, then the report should include:

A reconciliation of its equity under the previous GAAP at


the end of that comparable interim period to its equity
under Ind AS at that date
A reconciliation with its total comprehensive income under
Ind AS for that comparable interim period (current and
year-to-date). The starting point for that reconciliation
shall be total comprehensive income under the previous
GAAP for that period or, if an entity did not report such a
total, profit or loss under the previous GAAP.
Reconciliations described in section Explanation of
transition to Ind AS above or a cross-reference to another
published document that includes these reconciliations.

Quarterly financial information in case of


listed companies
Preparation or presentation of interim financial information for
listed companies is governed by the Clause 41 of the Listing
Agreement. Clause 41 currently requires that quarterly and
year-to-date results should be prepared in accordance with
the recognition and measurement principles laid down in AS
25 Interim Financial Reporting notified under the Company
(Accounting Standards) Rules, 2006 (as amended). Once a
company starts using Ind AS for annual financial statements,
it will be expected that the company uses the same standards
for quarterly reporting also. To address this aspect, appropriate
changes need to be made in the Listing Agreement. Moreover,
the listing agreement should prescribe a new format for
publishing Ind AS quarterly results.

In addition to presentation of interim financial information on


an ongoing basis, a specific issue needs to be considered for
presentation of interim financial information in the first year
of Ind AS adoption. Interim financial information provides an
update to the last presented annual financial statements and
should be read along with the last annual financial statements.
Companies are required to prepare such information using
standards that are expected to be reflected in their next annual
financial statements. Considering this and the fact that Ind AS
are applicable from beginning of the financial year, a company
needs to start presenting Ind AS financial information from the
first quarter of financial year in which it adopts Ind AS. Since
the company has prepared last annual financial statements
according to Indian GAAP and interim financial information is
prepared using Ind AS, this may not provide meaningful update
to the users. In many cases, the numbers may appear to be
confusing. This issue needs to be addressed appropriately.
For example, globally, in such scenarios, first-time adopters
are expected to include significantly more information than
would normally be included in an interim report. Examples of
additional annual disclosures to be included in the entitys first
interim report could include disclosures relating to retirement
benefits, income taxes, goodwill and provisions, amongst other
items that significantly differ from previous GAAP and those
required Ind AS disclosures that are more substantial than
previous GAAP.

Guide to First-time Adoption of Ind AS |

83

Ind AS conversion
challenges and
perspectives
Conversion to Ind AS is not just an accounting change. Rather,
Ind AS implementation effort is likely to impact functions
outside of the finance department, including IT, legal, sales,
marketing, human resources, investor relations and senior
management. In the section titled Key differences between Ind
AS and Indian GAAP, we have explained key financial reporting
impacts of transition to Ind AS. In this part, we will cover the
following:

1. Direct tax impact


2. Indirect taxes impact
3. IT impact
4. Internal control impact
5. Key considerations for Ind AS conversion project
6. Key areas to be addressed during Ind AS conversion
7. Leveraging from the global experience
8. Ind AS conversion process

Direct tax impact


Ind AS are meant primarily to serve the needs of investors
and therefore, are not suitable for the purposes of income
tax computation. To address tax issues arising from Ind AS
implementation, the Central Government (CG) had constituted
a Committee in December 2010, to draft the Income
Computation and Disclosure Standards (ICDS). Section 145 of
the Indian Income tax Act bestows the power to the CG to notify
ICDS to be followed by specified class of taxpayers or in respect
of specified class of income.

Recently, the Government notified 10 ICDS effective from the


current tax year itself (i.e., tax year 2015-16) for compliance by
all taxpayers following mercantile system of accounting for the
purposes of computation of income chargeable to income tax
under the head Profits and gains of business or profession or
Income from other sources. Though the ICDS are substantially
aligned to the current Indian GAAP, there are few critical
differences. Given below is an overview of key differences:

84 | Guide to First-time Adoption of Ind AS

ICDS I relating to accounting policies (corresponding to


AS 1)
ICDS I prohibits recognition of expected losses or mark-tomarket losses unless permitted by any other ICDS.
ICDS II relating to valuation of inventories (corresponding
to AS 2)

Under AS 12, government grants in the nature of


promoters contribution are equated to capital and hence
are included in capital reserves in the balance sheet. Under
ICDS VII, government grants should either be treated as
revenue receipt or should be reduced from the cost of
fixed assets based on the purpose for which such grant or
subsidy is given.

Use of standard cost method, as a technique for


measurement of cost, is not permitted in ICDS II.
ICDS III relating to construction contracts (corresponding
to AS 7)
During the early stages of a contract, where the outcome
of the contract cannot be estimated reliably, contract
revenue is recognized only to the extent of costs incurred.
This requirement is contained both in AS 7 and ICDS III.
However, unlike AS 7, ICDS III states that the early stage of
a contract should not extend beyond 25 % of the stage of
completion.
AS 7 requires a provision to be made for the expected
losses on onerous contract immediately on signing the
contract. Under ICDS III, losses incurred on a contract will
be allowed only in proportion to the stage of completion.
Future or anticipated losses will not be allowed, unless
such losses are actually incurred.

Under AS 12, recognition of government grants should be


postponed even beyond the actual date of receipt when it
is probable that conditions attached to the grant may not
be fulfilled and the grant may have to be refunded to the
government. Under ICDS VII, recognition of Government
grants cannot be postponed beyond the date of actual
receipt.

Since ICDS deals with computation of income under


Business or Other Sources heads, ICDS only deals with
securities held as stock-in-trade.

ICDS IV relating to revenue recognition (corresponding


to AS 9)

Under both ICDS VIII and AS 13, securities should be


valued at lower of cost or net realizable value (NRV). Under
AS 13, current investments are carried in the financial
statements at the lower of cost and fair value determined
either on an individual investment basis or by category of
investment. In contrast, ICDS requires that comparison
of cost and NRV shall be done category-wise (and not
for each individual security). Moreover, the categories
specified in AS 13 and ICDS VIII are different.

Under AS 9 revenue from service transactions is


recognized by following either the percentage completion
method or the completed contract method. Under ICDS
IV, only the percentage of completion method is permitted.

ICDS VI relating to the effects of changes in foreign


exchange rates (corresponding to AS 11)
Under AS 11, all mark-to-market gains or losses on
forward exchange or similar contracts entered into for
trading or speculation contracts are recognized in P&L. In
contrast, ICDS VI requires gains or losses to be recognized
in the income computation only on settlement.

Under AS 11, exchange differences on a non-integral


foreign operation are not recognized in the P&L, but
accumulated in a foreign currency translation reserve.
Such a foreign currency translation reserve is recycled
to the P&L when the non-integral operation is disposed.
Under ICDS VI, exchange differences on non-integral
foreign operations will also be included in the computation
of income.
ICDS VII relating to government grants (corresponding to
AS 12)

ICDS VIII relating to securities (corresponding to


AS 13)

Under ICDS VIII unlisted or thinly traded securities should


be valued at cost.
Under ICDS VIII, cost which cannot be ascertained by
specific identification should be determined on the basis of
first-in- first-out (FIFO) method.

ICDS IX relating to borrowing costs (corresponding to AS


16)
Under AS 16 in the case of borrowings in foreign currency,
borrowing costs include exchange differences to the extent
they are treated as an adjustment to the interest cost.
Under ICDS IX, borrowing cost will not include exchange
differences arising from foreign currency borrowings.
AS 16 requires the fulfilment of the criterion substantial
period of time for treating an asset as qualifying asset

Guide to First-time Adoption of Ind AS |

85

for the purposes of capitalization of borrowing costs. ICDS


retains substantial period condition (i.e. 12 months) only
for qualifying assets in the nature of inventory but not
for fixed assets and intangible assets. Therefore, ICDS
requires capitalization of borrowing costs for tangible and
intangible assets even when they are completed in a short
period.
Under ICDS IX, capitalization of specific borrowing cost
should commence from date of borrowing. Under AS 16,
borrowing cost is capitalized from the date of borrowing
provided the construction of the asset has started.
ICDS IX contains an allocation formula for capitalizing
borrowing costs relating to general borrowings.
Unlike AS 16, income on temporary investments of
borrowed funds cannot be reduced from borrowing costs
eligible for capitalization in ICDS.
Unlike AS 16, requirement to suspend capitalization of
borrowing costs during interruption of active construction
of asset is removed in ICDS.

ICDS X relating to provisions, contingent liabilities and


contingent assets (corresponding to AS 29)
Under ICDS X, a provision is recognized when it is
reasonably certain that an outflow of economic
resources will be required to settle an obligation. Under
AS 29, the criterion is probable. In accounting literature,
the term reasonably certain and probable generally
indicate the same threshold levels.
Under ICDS X a contingent asset is recognized when the
realization of related income is reasonably certain.
Under AS 29 the criterion is virtual certainty.

It may be noted that ICDS are not tax neutral vis--vis the
current Indian GAAP and tax practices currently followed
and may give rise to litigation. For example, based on AS 7,
the current practice is to recognize any expected loss on a
construction contract as expense immediately. In contrast,
ICDS will require expected losses to be provided for using the
percentage of completion method.

86 | Guide to First-time Adoption of Ind AS

ICDS I lays out the accrual concept as a fundamental


accounting assumption. The prohibition on recognizing
expected or mark-to-market losses appears to be inconsistent
with the accrual concept. Though mark-to-market losses are
not allowed to be recognized, there is no express prohibition on
recognizing mark-to-market gains. The ICDS therefore, appear
to be one sided, determined to maximize tax collection, rather
than routed in sound accounting principles. Matters such as
these are likely to create litigious situations.
The preamble of the ICDS states that where there is conflict
between the provisions of the Income-tax Act, 1961 and ICDS,
the provisions of the Income-tax Act will prevail. Consider that
a company has claimed mark-to-market losses on derivatives
as deductible expenditure under section 37(1) of the Incometax Act. Can the company argue that this is a deductible
expenditure under the Income-tax Act (though the matter
may be sub judice) and hence should prevail over ICDS which
prohibits mark-to-market losses to be considered as deductible
expenditure?
Consider another example that a company receives government
subsidy for non-depreciable asset. Hitherto, it was accepted
that it is a capital receipt not falling within the definition of
income and did not impact business income computation.
Can the company argue that such receipt cannot be taxed in
absence of amendment to definition of income and hence
should prevail over ICDS which requires such receipt to be
recognized as income over the period of meeting related
obligations? These are untested areas, and could be litigated.
All ICDS (except ICDS VIII relating to Securities) contain
transitional provisions. These transitional provisions are
designed to avoid double jeopardy. For example, if foreseeable
loss on a contract is already recognized on a contract at 31
March 2015, those losses will not be allowed as a deduction
again on a go forward basis using the percentage of completion
method. On the other hand, if only a portion of the loss was
recognized, the remaining foreseeable loss can be recognized
using the percentage of completion method. The detail

mechanism of how this will work is not clear from the ICDS.
The transitional provisions are not always absolutely clear in
all cases. In the case of non-integral foreign operations, e.g.,
non-integral foreign branches, ICDS requires recognition of
gains and losses in the P&L (tax computation), rather than
accumulating them in a foreign currency translation reserve. It
is not absolutely clear from the transitional provision whether
the opening accumulated foreign currency translation reserve,
which could be a gain or loss, will be ignored or recognized in
the first transition year 2015-16. Since the amounts involved
will be huge, particularly for many banks, the interpretation of
this transitional provision will have a huge impact for those who
have not already considered the same in their tax computation
in past years.
We understand that a CBDT committee is examining these
issues. We recommend that companies must engage with these
agencies to put their concerns in the forefront. It is imperative
that companies identify and address these issues in a timely
manner

MAT impact
ICDS are meant for normal tax computation. Therefore, as
things stand now, ICDS has no impact on minimum alternate tax
(MAT) for corporate taxpayers, which will continue to be based
on book profit determined under current AS or Ind AS, as the
case may be.
The application of Ind AS will impact the calculation of book
profits. Adopting Ind AS book profits as a starting point for
computing MAT may have a significant impact on the MAT
liability. In our view, a key issue is likely to arise regarding the
payment of MAT on fair value gains recognized in the profit
and loss account. In the absence of realized gains, paying taxes
on such gains will strain companies cash flows. Moreover,
issues will arise with regard to gains/losses adjusted to retained
earnings in the opening Ind AS balance sheet in accordance
with Ind AS 101. It is not clear whether these adjustments will
be considered for MAT computation or they will permanently
avoid MAT implications.
We believe that the regulators will need to consider the pros
and cons of various approaches in deciding in final approach
to be followed. The issue may become far more complicated if
one were to consider that Ind AS is applicable on different dates
based on the specified criterias, and for some entities, Ind AS
does not apply. Overall, the Central Government through the
Central Board of Direct Taxes (CBDT) will have to play a highly
pro-active role to provide clarity and minimize the potential
areas of litigation.

Indirect taxes impact


Currently, incidence of indirect tax and its computations is
typically not based on treatment in the financial statements.
However, in the past, tax authorities and courts have considered
accounting treatment while deciding upon taxability. Therefore,
the application of Ind AS may not have a direct implication
on indirect tax computation; however, it may increase the
possibility of litigation. This is because the application of Ind AS
results in significantly different accounting in many cases. If the
treatment as per Ind AS results in higher indirect tax payment,
tax authorities may argue that the company should pay tax
based on substance reflected in the financial statements. The
following are a few examples in this regard:
1. Under Ind AS, a BOT operator recognizes a financial
asset or intangible asset, as the case may be, in lieu of
its investment in developing the infrastructure. This is
accounted as though the operator provides construction
services to the grantor and, in exchange, receives a
financial asset or an intangible asset at fair value, i.e.,
cost plus margin. Under indirect tax laws, there have
been recent judicial pronouncements contending that the
operator in a BOT contract can be construed as a dealer
for the purpose of assessment of VAT/works contract
tax. The application of Ind AS accounting may further
strengthen the argument of indirect tax authorities that
the operator needs to pay works contract tax on such
construction revenue.
2. Application of Ind AS may require companies to
identify and account for separately leases embedded in
transactions structured as sale or purchase or service. For
example, a manufacturing company will need to analyze
its exclusive sale/purchase agreement for embedded
leases. Under Indian GAAP, such arrangement is typically
accounted for as sale/purchase of goods and sales tax/VAT
is payable on the sale. However, if the company determines
that the agreement contains a lease, it may raise an issue
on whether it needs to pay service tax on lease rent? If yes,
what will be the position on sales tax/VAT?
3. Under Ind AS, companies may need to split composite
contracts into various elements and allocate proportionate
value toward items such as service element and other free
items. Will tax authorities consider such split for calculation
of sales tax and service tax liabilities? What will happen if
such split results into recognition of revenue at an earlier
stage than when the bill is actually raised? Will tax liability
be also correspondingly advanced?

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87

4. In case of sale on deferred payment terms, a company will


recognize sale at fair value of consideration receivable.
If Ind AS financial statements are used for tax purposes,
will the tax authorities accept fair value consideration
for computation of excise duty/sales-tax liability or these
liabilities will continue to be determined based on invoice
amount? Will deduction of tax at source (TDS) requirement
apply on finance cost/finance income in recognized in
this manner?
Further, there are certain BOT operators who have entered
into revenue-sharing arrangement with the government. In the
intangible asset model, a BOT operator recognizes revenue
twice: once construction revenue on construction of the
infrastructure and later, toll revenues. In such cases, there can
be an issue on whether they are required to share revenue
twice with the government?
It is recommended that the government clarifies that it will
maintain a tax neutral position with respect to indirect taxes
and other levies.

IT impact
Information technology (IT) is likely to play a substantial role
in the process of converting to Ind AS. It is advisable not to
underestimate the time and effort the conversion process will
require, or the inherent potential risks. A well-planned process
is critical for converting successfully while controlling costs,
maintaining reporting integrity, and avoiding potential financial
restatements or other surprises.
The adoption of Ind AS requires changes in the recognition,
measurement and disclosure of many items in the financial
statements. Both financial and business systems need to
deliver the information required for compliance with Ind AS.
Accordingly, IT systems will need to be modified so that the
financial data produced conform to Ind AS. It is important to
note that such changes are not restricted to IT modules relating
to general ledger entries or sub-ledger entries, but also affect
applications such as asset management systems, financial
instruments and payroll systems. Our experience with global
IFRS conversions has shown there are four main drivers that
determine the scale of an IT project.
The main driver for system- and IT-related changes is how the
new accounting standards are to be applied. The impact will
be influenced by the existing financial reporting processes
and the industry in which an entity operates. For example, the
new reporting requirements regarding property, plant and
equipment will likely be far more difficult to implement if an
entity operates in a capital-intensive industry. Similarly, an

88 | Guide to First-time Adoption of Ind AS

entity with significant assets/liabilities, requiring the use of fair


values, would need to specifically focus on the computation
of fair values. When an active market does not exist for the
measurement of fair value, the entity will have to use other
more complex valuation techniques. In such an event, IT
systems need to be able to capture the data required for such
valuations.
An entitys finance team needs to work closely with its IT
team to understand the system-related impact of Ind AS
requirements. Conducting a diagnostic impact assessment at
the beginning of a project will help to identify the differences
between existing accounting policies and practices and those
required under Ind AS. We recommend that the IT department
takes part in this assessment to identify affected systems and
required modifications early in the process. This will also help
organizations to effectively implement changes to best suit
their infrastructure and systems.
System changes from Ind AS are generally classified into three
main types:

Data changes: Ind AS can create additional data


requirements. For example, fixed assets must be broken
down by significant components to apply component
accounting more comprehensively under Ind AS. This may
require the creation of new asset types and definitions of
the useful life of each asset. Separate master data can be
maintained to track useful lives, depreciation rates and
amounts, which requires extensive data conversion and
mapping of historical data.
System configuration/parameter changes: Ind AS may
change existing system configurations and routines, e.g.,
identification of multiple element contracts.
Reporting changes: Ind AS differences will have an impact
on reporting tools and reports. For example, the manner
in which revenue is determined under Ind AS for contracts
involving deferred payments may be substantially different
from the existing practice in India. This difference will have
a substantial impact on reports relating to revenue.

Though Ind AS is applicable from 1 April 2016 for companies


covered under the mandatory phase 1, comparable data will be
required for the financial year 2015-16. In other words, for the
period 2015-16, the system will have to support dual reporting,
i.e., Indian GAAP for statutory reporting and Ind AS for keeping
comparable data ready. Perhaps the most significant impact
may be determining how the systems will support the dualreporting requirement for the period 2015-16. This may
require an entity to maintain two parallel charts of accounts. We
believe that some systems, such as new releases of enterprise

resource planning (ERP) packages, may provide dual-reporting


functionality. In other cases, the entities may undertake the
application upgrades or the implementation of new applications
or modules to handle dual reporting through their IT systems.
Alternatively, the information may need to be handled outside
the IT systems. This can be done manually or by using shortterm solutions in the initial period. What approach is best would
be determined by the scale of changes required by Ind AS and
the extent of IT automation, resource and cost considerations.

Internal control impact


The requirement to maintain effective internal control throughout the conversion process cannot be over-emphasized. The
Companies Act 2013, as well as the listing agreement, require a
company to ensure existence as well as operating effectiveness
of internal financial control:

IT organization structure
Our experience with IFRS conversion shows us that the
structure of an IT function may have a significant impact on
the resources required to implement Ind AS. For example, if an
entity has a centralized IT function, a focused IT Ind AS project
team can probably make the required system or IT process
changes from a single location. However, if the IT function is
decentralized across multiple locations and business units,
the number of affected people, systems, business units and
processes could be significant. IT personnel would also need
some training to understand Ind AS requirements and their
impact on IT systems.

Existing IT system plans


Ind AS can have a direct impact on an entitys system plans,
particularly on financial system implementations or upgrades.
If an entity has other large system projects on the horizon, it
would be better to identify interdependencies within the Ind AS
project and manage resources appropriately.
If an entity is implementing or upgrading financial systems in
parallel with the Ind AS project, the finance team may have to
make assumptions regarding functional system requirements
during the design phase of the upgrade or implementation.
Close co-ordination between the finance, IT and the systems
implementation teams is critical. We recommend that the
Ind AS project team has a representative from the systems
implementation team.

Application architecture
The general rule of thumb is simpler the application
architecture, easier would be the implementation. Typically,
conversion in a single-ERP environment is relatively
straightforward. Our experience shows that the complexity
and effort increase greatly if an entity has multiple ERPs or
customized applications supporting the financial processes.

Clause 49 of the Listing Agreement, among other matters,


requires that CEO/CFO will certify to the board that they
accept responsibility for establishing and maintaining
internal controls for financial reporting and that they have
evaluated the effectiveness of internal control systems of
the company pertaining to financial reporting.
The Companies Act 2013 requires the board to state that
directors have laid down internal financial controls, such
controls are adequate and were operating effectively.
Under the Companies Act 2013, the auditors report,
among other matters, should state whether the company
has adequate internal financial controls system in place
and the operating effectiveness of such controls.

In most cases, transition to Ind AS will require significant


changes in an entitys financial reporting framework. This may
cause significant changes in underlying processes and controls
and thereby increase the risk of error or fraud. Companies will
need to consider whether adequate controls are in place to
address Ind AS conversion challenges. They may also need to
modify its control strategy to reflect changed risk assessments.
Given below are few example of impact on control consideration
arising from Ind AS application:

Under Ind AS, separate accounting for components of PPE


is more rigorously and more broadly applied. To ensure the
same, controls over the componentization of assets may
be required. Controls with respect to reviewing judgments
over both the identification of significant components
and the assignment of costs to components, including
borrowing costs, will be required. Additional amortization
categories may affect configuration of the fixed asset
sub-ledger. Controls over system changes may need to be
considered prior to any significant changes.

Guide to First-time Adoption of Ind AS |

89

Ind AS 101 allows entities to elect to measure individual


items of PPE, including leased assets under a finance
lease, at fair value at the date of transition to Ind AS. The
fair value becomes the deemed cost at that date, with
the corresponding adjustment being booked to retained
earnings in the opening Ind AS balance sheet. Where
appraisals will be conducted, controls need to ensure
that an appropriately qualified individual conducts any
appraisal. Controls are also needed over the inputs and
outputs provided to the appraiser and the review of the
work, including assumptions, of the appraiser.
Ind AS 37 requires that all provisions be discounted
where the effect of time value is material. It also
requires re-measurement of provisions at the end of
each reporting period for changes in the discount rate.
Appropriate change management controls are required
for the appropriate selection of a discount rate each
period. Controls are also required over the revaluation of
obligation each period.
We may emphasize that these considerations are
illustrative only and specific control impacts will depend
on the facts and circumstances of each entity. In deciding
control impacts, the entity should also address the
following key aspects

Some entities engage external advisers or their auditors


to assist management in Ind AS conversion. In these
cases, controls should be implemented over the proper
exchange of information with the advisers. Also, the senior
management should appropriately review the assumptions
and recommendations of the adviser. Appropriate senior
members of management must oversee the consultation
process and conduct a judicious review of the final
recommendations before making accounting policy
decisions for the entity
Accounting policy and elective exemption decisions should
be approved by management on a timely basis. The entitys
audit committee should be involved in the process well
ahead of the transition date and before the entity begins to
apply the new policies.

90 | Guide to First-time Adoption of Ind AS

In accordance with Ind AS 101, the first Ind AS financial


statements should include comparative reconciliations
between Ind AS and the previous GAAP. Controls should
be in place over both the creation of the opening balance
sheet and the reconciliation process. We believe that the
reconciliations are most transparent and informative when
done on a line-by-line basis. The nature of the controls
over the reconciliation process will depend on the number
of reconciling adjustments expected and how an entity
chooses to track its accounting records concurrently under
Ind AS and the previous GAAP.
If possible, the entities should conduct control testing
earlier than the due date. This approach may contribute
to both efficiency and effectiveness by reducing resource
constraints at the time of transition, allowing for early
detection and remediation of control failure issues. This
will also facilitate interviews of individuals involved in the
conversion process while the details are still fresh.

Key considerations
for Ind AS conversion
project
The conversion to Ind AS presents potential opportunities that
companies may want to further examine and explore. Many
companies operate on a global scale and have competitors
that are not based out of India. Being able to provide financial
reports to investors and other interested parties based on the
same/similar accounting standards used by those peers may
increase the companys comparability with its peers.
Once the conversion commences, companies may want to
understand the financial reporting decisions being made
by their peers and other companies around exemptions/
relaxations given on first-time adoption. This will require
converting companies to share their thoughts and perspectives
on potential policies with each other. Notably, companies that
have already adopted IFRS in Europe, Australia or elsewhere
can provide useful information. Further, investors and market
analysts will also want to be aware of the choices that the
company is making and how these choices compare against the
ones made by the companys peers.
Some companies will realize that there is a significant
underlying opportunity in using the conversion project as a
means to drive other areas of change. For example, companies
may consider the conversion to Ind AS as an opportunity to
streamline accounting and reporting processes or to accelerate
the financial statement close process.
Along with opportunities, there are many potential risks also
attached with Ind AS conversion process. Conversion to Ind
AS will be one of the most fundamental changes in financial
reporting in the Indian history. The potentially pervasive nature
of the changes at the accounting, functional, transactional and
internal control levels also increases the risk of misstatement.
Further, the current financial reporting environment has little
tolerance for mistakes, and it will be important for all companies
to get the conversion right in the first time. Misstatements, as
well as missed reporting deadlines, present a significant risk to
companies that are converting.

There are various risks associated with the conversion to Ind


AS that will have to be addressed by the management. The
examples of potentially significant risk areas include:

Failure to communicate the effects and results to


stakeholders, including boards, audit committees, investors
and analysts
Accounting and reporting under multiple accounting
frameworks during the transition period
Maintaining consistency in the manner in which the various
Ind AS principles are applied throughout the organization,
including the potential to have to rethink accounting policy
decisions made by subsidiaries who have already adopted
Ind AS or their equivalents
Retention of key employees
Excessive costs brought on by ineffective planning, project
management and/or rework
Unreasonable or excessive work levels, brought on by
inappropriate planning or unreasonable expectations
Missed deadlines in the conversion timetable
Inability of the CEO/CFO/Board/auditor to conclude and
certify on the effectiveness of the companys internal
controls over financial reporting as required under the
Listing Agreement/Companies Act 2013

To mitigate these risks, the boards should pay close


attention to the details of the managements approach for
Ind AS conversion and satisfy themselves that it covers all
appropriate areas, and is based on sound project management
principles. While the management will be responsible for the
conversion execution, boards need to be confident in the
managements plan, thoroughness and diligence. Management
should inform the board and the audit committee on a regular
basis as to its plan and progress. As such, audit committees
should typically include a standing Ind-AS agenda update item
at their periodic meetings.

Guide to First-time Adoption of Ind AS |

91

Key areas to be
addressed during Ind
AS conversion
No two Ind AS conversion projects will ever be the same.
However, while the specific issues that the companies will
face during their conversion will vary widely because of all
the variables at play, the key areas that the management and
boards will need to address during the conversion should be
broadly similar.
1. Project launch and planning activities: The initial
decisions made during the project set-up phase tend to
be crucial for eventual project success. These decisions
include:
a) Creating a project management function to coordinate
project activity and monitor/report progress
b) Structuring the project team based on the results of the
impact assessment phase
c) Assigning sufficient resources to the project and
determining that the team comprises individuals with
appropriate skills to fulfil their responsibilities
2. Revision of accounting policies: Reassessing accounting
policies under Ind AS will be one of the most important
elements of the project because decisions made in this
area will drive many of the changes required throughout
the business and will have direct implications for the
future business results. For instance, accounting policy
decisions will affect data collection requirements, which,
in turn, will affect IT system requirements, business
processes to collect and record the data, internal control
systems covering data validity and functional resourcing
requirements. The tax-related effects of revisions of
accounting policies will also need to be addressed in the
conversion process. Audit committees and boards will need
to review and be comfortable with the policies selected by
management.

3. Application of Ind AS 101: Another key area that


the management will need to address with respect to
accounting policies is how it will apply Ind AS 101. Ind
AS 101 provides guidance for businesses on how to
adopt Ind AS for the first time and provides companies
with a number of voluntary exemptions and mandatory
exceptions from the requirements of other standards. The
decisions made in applying Ind AS 101 will often have a
significant effect on the financial statements for many
years to come.
4. Development of skeleton financial statements compliant
with Ind AS: Companies will have to redraft the sections
of their financial statements to meet Ind AS disclosure
requirements. There are multiple benefits in preparing a
skeleton set of financial statements during the preliminary
phases of the project as it focuses attention on the actual
disclosure requirements of the business, and therefore, is
crucial in the process of identifying data gaps that need
to be plugged. It is also useful to put the overall change
management challenge in perspective and give project
teams a concrete goal.
5. Preparation/restatement of financial information from
Indian GAAP to Ind AS for comparative accounting
periods: The compilation of comparative financial
information for inclusion in the first set of Ind AS financial
statements may prove to be one of the most challenging
areas of the project. The board, through its audit
committee, needs to be satisfied as to whether careful
consideration has been given to the approach adopted by
the management to compile this information.
6. Transition approach: While some companies outside the
India converted top-side only at a consolidated level, this
spreadsheet approach is not ideal. Accounting treatments
and controls should be pushed down to the subsidiary
and transaction level. This will be very useful in compiling
relatively more accurate data and maintaining effective
control. Further, the spreadsheet approach may not work
in long term. The audit committee will need to carefully
consider and opt for the transition approach that is more
appropriate and better suited to its business.
7. Identifying and resolving data capture issues: The
increased level and complexity of certain financial
disclosures expected under Ind AS may require significant
project resources to identify and set up processes to collate
this data. Some of the data underlying the new disclosures
may be time consuming to extract or may need significant
analysis before it is ready for disclosure purposes. Boards
need to be satisfied that the managements plans include
adequate mechanisms to identify and resolve data gaps.

92 | Guide to First-time Adoption of Ind AS

8. Retraining of personnel: Boards need to be satisfied in


terms of adequate investment being made in retraining
employees throughout the organization in order to meet
their changed technical knowledge needs, as well as be
equipped to facilitate the roll out of accounting policy
changes and the associated revised business processes and
procedures.
9. Communication with stakeholders: Managing investors
and other stakeholders expectations with respect to the
impact of Ind AS and the companys progress toward
conversion will be an important area for boards to monitor.
Clear, continuous and consistent communication with
stakeholders will reduce the risk of misunderstandings and
aid a smooth transition.
10. Audit committee financial literacy and retraining: The
training requirements will also apply to members of the
audit committee. Whether trained through management
briefings or by outside parties, audit committee members
should have sufficient knowledge about Ind AS to be able
to evaluate managements assessments and selection of
accounting policies.

Guide to First-time Adoption of Ind AS |

93

Leveraging from the


global experience
Indian businesses have the benefit of the experience of
countries that have already converted to IFRS. We have detailed
some of the issues encountered and the key lessons one can
learn from their experiences in the following table:

Issues identified

Key lessons learnt

The scale and complexity of the project


and the time frame needed were
underestimated.

Conducting a thorough impact assessment, followed by a detailed planning exercise up


front, is crucial for a successful transition. Conversions could entail functional changes
as well as technical accounting changes.

The project lacked adequate buy-in from


the companys senior management early
on in the project.

The tone from the top is an important driver of change. The board sponsorship of the
project is crucial.

The importance of having a proper project management office function capable of


coordinating project activities and a well- structured conversion methodology cannot
be overemphasized.
Slight accounting differences can have a
A methodical approach to review accounting differences is essential to assess the
significant effect on financial results.
overall financial impact.
Technical training will be a critical component of the conversion, especially for business
Unfamiliarity of numbers and principles unit heads, who may not be familiar with the implications of the changes that new
standards will bring. Investor relations will also need a strong educational grounding to
arising from changes
communicate the impact to investors.
Invest the time necessary to roll out business process changes such as accounting
Poor communication existed between
project team and business units regarding practices, updated control mechanisms and changes in reporting requirements to the
wider organization.
effects of changes.
Changes were often not fully embedded
EU companies that used manual workarounds to meet short deadlines have to
in back offices and general ledger
subsequently redesign processes and augment their systems to eliminate the
systems. As a result, stand-alone manual
inefficiencies these workarounds created. Indian companies should use the time
workarounds were created, including
available to proactively address these changes.
spreadsheet accounting.
The top-side solutions do not cause the organization to adjust, and the finance group
The top-side solutions did not work.
feels all the pain. It is important to push down the conversion to the transaction
level throughout the organization as early as possible.
The tax implications of the conversion process may extend beyond accounting effects.
The early involvement of tax personnel in the process may mitigate potential for
Tax personnel were frequently
unexpected results. Companies will benefit from sufficient resources and adequate
underrepresented in the conversion
lead time to address tax issues and to make necessary changes to tax processes and
process.
technology.
The projects suffered from poor project
management.

94 | Guide to First-time Adoption of Ind AS

Ind AS conversion
process
In an Ind AS conversion, an entity undertakes to change its
financial reporting from its current GAAP (Indian GAAP for
most Indian companies) to Ind AS. Obviously, differences
between the Indian GAAP treatment and Ind AS would be one
of the key inputs to the conversion process in case of Indian
companies. These differences may vary significantly from one
company to another depending on the industry and the current
accounting policies chosen under Indian GAAP. However, the
magnitude of an Ind AS conversion project will not depend
solely on the magnitude of the GAAP differences, but will be
influenced by other factors such as:

The quality and flexibility of the existing financial reporting


infrastructure,

The size and complexity of the organization, and

The effect of GAAP changes on the business.

Ultimately, the purpose of an Ind AS conversion is to put


companies in a position, where they are able to report, unaided
and reliably, under Ind AS and are able to recognize the Ind AS
dimension of their actions. However, before the actual start of
the conversion project, an initial diagnostic phase should put
companies in a position where they are aware of:

The differences between Ind AS and the companys current


accounting policies,
The impact of the change to Ind AS on the financial
statements,
The impact of the change to Ind AS on tax, business IT and
process,
The impact of Ind AS on future business decisions, and
An understanding of the approach underlying the
formulation of Ind AS.

Need for conversion methodology


Many companies perceive conversion projects purely as
a technical accounting exercise. With a major underlying
difference of principle as embodied in Ind AS this is a grave
mistake. Ind AS conversions, if not properly planned, are likely
to lead to a number of unfortunate results. Common among
these are:

Failure to involve all people with the required knowledge,


business decisions taken in ignorance of the financial
reporting consequences, unreliability and slowness in
producing Ind AS financial statements, and
Gross underestimation of the time required to convert.

Conversion to Ind AS will be an exercise in change


management. Adopting Ind AS may affect many facets of an
organization beyond its financial reporting. Every aspect of a
company affected by financial information has the potential for
change (for example, key performance indicators, employee
and executive compensation plans, managements internal
reporting, investor relations and analyst information). Both
the process and the implications of the conversion can vary
widely among companies based on a number of variables, such
as levels of expertise, degree of centralization of accounting
processes and data collection, and the number of existing
accounting methods currently being used. Often, information
and data not currently collected and/or warehoused may be
needed to produce the required Ind AS information.
The conversion to Ind AS will entail a business wide change
management exercise and should be approached using a
structured methodology encompassing the best practices of
project management. Such methodology ensures conversion
assignments are properly planned and executed. The
methodology also ensures that the typical pitfalls for the
inexperienced conversion team are avoided by:

Promoting the re-use of knowledge,


Avoiding costly dead-ends resulting from poor planning
and co-ordination,
Ensuring efficient use of staff time,
Allowing a mix of experienced and less experienced staff,
thereby, facilitating knowledge transfer, and
Improving the quality of the work.

Guide to First-time Adoption of Ind AS |

95

To take full advantage of the opportunities arising as a result


of conversion to Ind AS, the conversion methodology needs
to be flexible and customized to the needs of a company.
As with any major finance transformation project, the full
support of the board and senior management will be critical to
the success of the conversion effort. Boards should pay close
attention to the details of managements proposed approach
to the Ind AS conversion to satisfy themselves that it covers all
appropriate areas and is based on sound project management
principles. While management will be responsible for the
conversion execution, boards need to be confident in
managements plan, thoroughness and diligence. Management
should inform the board and the audit committee on a regular
basis as to its plan and progress. As such, audit committees
should generally include a standing Ind AS agenda update
item at their periodic meetings.

Program
execution

Work streams

Diagnostic

Design
and planning

The process
A sample methodology for conversion is shown above, which
management may consider for Ind AS conversion.
The methodology takes, as a starting point, the fact that an
Ind AS conversion project needs to address more than just
accounting issues and that a conversion project is sufficiently
complicated to warrant professional project management.
It is for these reasons that the methodology comprises
five phases, each of which deals with a specific part of the
conversion, and that throughout the project it recognizes five
different workstreams, each dealing with a specific aspect
of the conversion process. This is to facilitate involvement of
specialists on need basis. It is, however, important to recognize
that the phases can overlap one another and entities need
not wait for completion of one phase to end before beginning
another. Also, a clear breakdown of all the activities by
workstream is not always possible as a mandatory allocation of
activities by phase. Thus, this methodology should be tailored
according to project specificities, starting point and in place
project structure, etc.

Solution
development

Accounting and reporting

Tax

Business processes and systems

Regulatory and industry

Change management, communication and training

Project management

96 | Guide to First-time Adoption of Ind AS

Implementation

Post
implementation

Key goals and outputs of each phase


Diagnostic
This phase involves high level identification of accounting and
reporting differences and the consequences to the business,
IT, processes and tax. The major outcome management should
expect from this phase includes an impact assessment report,
which provides implications on above areas. It also entails
determining a high-level roadmap for future phases of the
conversion. This phase will also help management to identify
potential interdependence between the Ind AS conversion
project and current or planned organization-wide initiatives (for
example, new accounting system implementations such as ERP
and finance transformations) and an assessment of, whether
the company has adequate resources to complete a conversion.

Design and planning


This phase involves setting up the project infrastructure, the
project management function, including conversion roadmap
and change management strategy. The aim of this phase is to
set-up a core Ind AS team, framing conversion time-tables and
deciding on detailed way-forward. Formation of the project
structure, project charter, communication plan, training plan
and expanded conversion roadmap are typical outputs from this
phase.

Implementation
This phase involves roll out of solutions developed in the
previous phase. In this phase the company will conduct a
process of dry-run of financial statements to ensure that before
the reporting deadline, company is geared up to prepare Ind
AS financial statements. Post dry-run financial statements,
the company will roll-out final deliverables, i.e., the opening
Ind AS balance sheet and the first Ind AS financial statements.
All business and process solutions developed will also be
implemented to facilitate the company transition to the new
reporting framework.

Post-implementation
This phase involves an assessment of how various solutions
developed work in the implementation phase and the
identification of any issues in the operational model. These
issues are tackled in this phase to ensure successful on-going
functioning of systems and processes in Ind AS reporting
regime. On-going update training is also provided, to ensure
that companys personnel are updated with latest Ind AS
developments, and also changes are made in systems and
processes. Ind AS manuals will also need to be regularly
updated for changes in Ind AS.

Solution development
The objective of this phase is to identify solutions to various
issues identified in relation to accounting and reporting, tax,
business process and system changes. Typical outputs from
this phase comprise of Ind AS accounting manuals, group
reporting packages, Ind AS skeleton financial statements, group
accounting policies, technical papers on Ind AS accounting
issues, crystallizing the impact on current and deferred tax,
developing solutions for tax functions and identifying processes
which need to be re-designed, modified or developed.

Guide to First-time Adoption of Ind AS |

97

Appendix: Sample Ind


AS reconciliation note
for first Ind AS financial
statements
This Appendix presents an illustrative example of the
reconciliation disclosures required by Ind AS 101 using a
fictional company, FTA Limited (FTA or the company).
The example assumes that FTA Groups first Ind AS financial
statements are for the year ended on 31 March 2017, with
a transition date of 1 April 2015. FTA prepared Indian GAAP
annual financial statements for the year ended 31 March 2016.
The intent of the example is to illustrate the periods to be
reconciled and the type of disclosures required to explain the
related adjustments. The example is not comprehensive and is
not intended to reflect all possible accounting entries that would
be necessary for a first-time adopter.

First-time adoption of Ind AS


FTA Groups consolidated financial statements (CFS) for the
year ended 31 March 2017 are the first annual financial
statements which the Group has prepared in accordance with
Ind AS. For periods up to and including the year ended 31
March 2016, the Group prepared its CFS in accordance with
Indian GAAP, including accounting standards notified under
section 133 of the Companies Act 2013 read together with
paragraph 7 of the Companies (Accounts) Rules, 2014.

98 | Guide to First-time Adoption of Ind AS

Accordingly, the Group has prepared CFS, which comply with


Ind AS applicable for periods ending on or after 31 March
2017, together with the comparative period data as at and for
the year ended 31 March 2016, as described in the summary
of significant accounting policies. In preparing the CFS, the
Groups opening balance sheet was prepared as at 1 April 2015,
the Groups date of transition to Ind AS. This note explains the
principal adjustments made by the Group in restating its Indian
GAAP CFS, including the balance sheet as at 1 April 2015 and
the CFS as at and for the year ended 31 March 2016.

Exemptions applied

Ind AS 101 allows first-time adopters certain exemptions from


the retrospective application of certain requirements under Ind
AS. The Group has applied the following exemptions:

he Group has elected that it will not apply Ind AS 103


T
Business Combinations retrospectively to business
combination (including acquisitions of subsidiaries that
are considered businesses for Ind AS, or of interests in
associates and joint ventures) occurring before 1 April
2014. Use of this exemption implies that Indian GAAP
carrying amounts of assets and liabilities, which are
required to be recognized under Ind AS, is their deemed
cost at the date of the acquisition. After the date of the
acquisition, measurement is in accordance with Ind AS.
Assets and liabilities that do not qualify for recognition
under Ind AS are excluded from the opening Ind AS
balance sheet. The Group did not recognize or exclude
any previously recognized amounts as a result of Ind AS
recognition requirements.
Ind AS 101 also requires that Indian GAAP carrying
amount of goodwill must be used in the opening Ind
AS balance sheet (apart from adjustments for goodwill
impairment and recognition or derecognition of intangible
assets). In accordance with Ind AS 101, the Group has
tested goodwill for impairment at the date of transition to
Ind AS. No goodwill impairment was deemed necessary at
1 April 2015.

The group has used same exemptions for acquisition of


interests in associates and joint ventures
However, the Group has applied Ind AS 103 to business
combinations occurring on or after 1 April 2014. The
Group has acquired only one business on slump sale basis
during the period beginning 1 April 2014 and ending
before the transition date.

s part of the business combination exemption, the group


A
has also used Ind AS 101 exemption regarding previously
unconsolidated subsidiaries. The use of this exemption
requires the group to adjust the carrying amounts of
the previously unconsolidated subsidiarys assets and
liabilities to the amounts that Ind AS would require in the
subsidiarys balance sheet. The deemed cost of goodwill
equals the difference at the date of transition to Ind AS
between (i) the parents interest in those adjusted carrying
amounts, and (ii) the cost in the parents separate financial
statements of its investment in the subsidiary. The cost of
a subsidiary in the parents separate financial statements is
the Indian GAAP carrying amount at the transition date.

he Group has not applied Ind AS 21 retrospectively


T
to fair value adjustments and goodwill from business
combinations that occurred before 1 April 2014, which is
also the cut-off date for the use of business combination
exemption. Such fair value adjustments and goodwill are
treated as assets and liabilities of the parent rather than
as assets and liabilities of the acquiree. Therefore, those
assets and liabilities are already expressed in the functional
currency of the parent or are non-monetary foreign
currency items and no further translation differences
occur.
reehold land and buildings, other than investment
F
property, were carried in the balance sheet prepared in
accordance with Indian GAAP on the basis of valuations
performed on 31 March 2014. The Group has elected
to regard those values as deemed cost at the date of the
revaluation since they were broadly comparable to fair
value.
ertain items of property, plant and equipment have been
C
measured at fair value at the date of transition to Ind AS.
The fair value so determined is deemed cost for these
items of property, plant and equipment.
ince there is no change in the functional currency, the
S
group has elected to continue with the carrying value for
all of its investment property as recognized in its Indian
GAAP financial as deemed cost at the transition date.
umulative currency translation differences for all foreign
C
operations are deemed to be zero as at 1 April 2015, i.e.,
date of transition to Ind AS.
I nd AS 102 Share-based Payment has not been applied to
equity instruments in share-based payment transactions
that vested before the date of transition to Ind AS. For
cash-settled share-based payment transactions, the Group
has not applied Ind AS 102 to liabilities that were settled
before the date of transition to Ind AS.
ppendix C to Ind AS 17 requires an entity to assess
A
whether a contract or arrangement contains a lease.
In accordance with Ind AS 17, this assessment should
be carried out at the inception of the contract or
arrangement. However, the Group has used Ind AS 101
exemption and assessed all arrangements for embedded
leases based on conditions in place as at the date of
transition.
he Group has designated equity instruments held for
T
purposes other than trading as at fair value through OCI
investments. This designation is made on the basis of facts
and circumstances existing at the date of transition to
Ind AS.
Guide to First-time Adoption of Ind AS |

99

he group has applied Ind AS 115 retrospectively. In


T
applying Ind AS 115 retrospectively, it has used the
following practical expedients:

For completed contracts, the group has not restated


contracts that begin and end within the same annual
reporting period;
For completed contracts that have variable
consideration, the group has used the transaction
price at the date when the contract was completed
rather than estimating variable consideration amounts
in the comparative reporting periods; and
For all reporting periods presented before the
beginning of the first Ind AS reporting period, the
group has not disclosed the amount of the transaction
price allocated to the remaining performance
obligations and an explanation of when the group
expects to recognize that amount as revenue.

The key impact of retrospective application of Ind AS 115


relates to accounting for customer loyalty program.

Estimates
The estimates at 1 April 2015 and at 31 March 2016 are
consistent with those made for the same dates in accordance
with Indian GAAP (after adjustments to reflect any differences
in accounting policies) except for the items where application of
Indian GAAP did not require similar estimation. The estimates
used by the Group to present these amounts in accordance with
Ind AS reflect conditions at 1 April 2015 the date of transition
to Ind AS and as of 31 March 2016.

100 | Guide to First-time Adoption of Ind AS

Hedge accounting
The Group uses derivative financial instruments, such as
forward currency contracts, interest rate swaps and forward
commodity contracts, to hedge its foreign currency risks,
interest rate risks and commodity price risks, respectively.
Under Indian GAAP, there is no mandatory standard that
deals comprehensively with hedge accounting. The group has
designated various economic hedges and applied economic
hedge accounting principles to avoid profit or loss mismatch.
All the hedges designated under Indian GAAP are of types
which qualify for hedge accounting in accordance with Ind AS
109 also. Moreover, the group, before the date of transition
to Ind AS, has designated a transaction as hedge and also
meets all the conditions for hedge accounting in Ind AS 109.
Consequently, the group continues to apply hedge accounting
after the date of transition to Ind AS.

Government loans
The Group has classified government loan received as a
financial liability in accordance with the principles of Ind AS
32. The Group has applied the requirements in Ind AS 109
prospectively to government loans existing at the date of
transition to Ind AS. Hence, the Group has not recognized the
corresponding benefit of the government loan at a belowmarket rate of interest as a government grant.

Group Reconciliation of equity as at 1 April 2015 (date of transition to Ind AS)


(INR million)
Footnotes

Indian GAAP

Adjustments

Ind AS

Equity and liabilities


Equity
Equity share capital

XXX

XXX

XXX

Other equity

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

Equity component of convertible preference shares

Securities premium
Treasury shares

XXX

XXX

XXX

a, b, q

XXX

XXX

XXX

i, q

XXX

XXX

XXX

XXX

XXX

XXX

i, q

XXX

XXX

XXX

Equity attributable to equity holders of the parent

XXX

XXX

XXX

Non-controlling interests

XXX

XXX

XXX

Total equity

XXX

XXX

XXX

Retained earnings
Reserve representing unrealised gains/losses
Foreign currency translation reserve
Other reserve

Non-current liabilities
Financial Liabilities
Interest-bearing loans and borrowings

c, q

XXX

XXX

XXX

Other non-current financial liabilities

XXX

XXX

XXX

XXX

XXX

XXX

Long term provisions


Government grants

c, d

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

Deferred tax liabilities

XXX

XXX

XXX

Other liabilities

XXX

XXX

XXX

XXX

XXX

XXX

Deferred revenue/Contract liability


Net employee defined benefit liabilities

Guide to First-time Adoption of Ind AS | 101

(INR million)
Footnotes

Indian GAAP

Adjustments

Ind AS

XXX

XXX

XXX

c, d

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

Liabilities directly associated with the assets classified


as held for distribution

XXX

XXX

XXX

Total liabilities

XXX

XXX

XXX

Total equity and liabilities

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

Trade and other receivables

XXX

XXX

XXX

Other current financial assets

XXX

XXX

XXX

Cash and short-term deposits

XXX

XXX

XXX

Prepayments

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

Current liabilities
Financial Liabilities
Interest-bearing loans and borrowings
Trade and other payables
Other current financial liabilities
Government grants
Deferred revenue/ Contract liability

Income tax payable


Provision

Assets
Non-current assets
Property, plant and equipment

c, d, l, m

Investment properties
Intangible assets
Investment in an associate/ joint venture

c, d

Other non-current financial assets


Deferred tax assets

Current assets
Inventories
Financial assets

Assets classified as held for distribution

Total assets

102 | Guide to First-time Adoption of Ind AS

Group reconciliation of equity as at 31 March 2016


(INR million)
Footnotes

Indian GAAP

Adjustments

Ind AS

Equity and liabilities


Equity
Equity share capital

XXX

XXX

XXX

Equity component of convertible preference shares q

XXX

XXX

XXX

Treasury shares

Other equity
XXX

XXX

XXX

Retained earnings

a, b, q i, q

XXX

XXX

XXX

Reserve representing unrealised gain/losses

i, k

XXX

XXX

XXX

Other Reserve

i, q, k

XXX

XXX

XXX

Equity attributable to equity holders of the parent

XXX

XXX

XXX

Non-controlling interests

XXX

XXX

XXX

Total equity

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

Non-current liabilities
Financial liabilities
Interest-bearing loans and borrowings

c, q

Other non-current financial liabilities

Long term provisions


Government grants

c, d

Deferred revenue/ Contract liability

XXX

XXX

XXX

XXX

XXX

XXX
XXX

Net employee defined benefit liabilities

XXX

XXX

Deferred tax liabilities

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

Other non-current liabilities

Guide to First-time Adoption of Ind AS | 103

(INR million)
Footnotes

Local GAAP

Adjustments

Ind AS

Current liabilities
Financial liabilities
Interest-bearing loans and borrowings
Trade and other payables
Other current financial liabilities

XXX

XXX

XXX

c, d

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

Government grants
Deferred revenue/ Contract liability

Income tax payable


Provisions

Liabilities directly associated with the assets classified


as held for distribution
Total liabilities

XXX

XXX

XXX

Total equity and liabilities

XXX

XXX

XXX

XXX

XXX

XXX

Assets
Non-current assets
Property, plant and equipment

c, d, l, m

Investment properties

XXX

XXX

XXX

Intangible assets

XXX

XXX

XXX

Investment in an associate/ joint venture

c, d

Other non-current financial assets


Deferred tax assets

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

Current assets
Inventories

Financial assets
Trade and other receivables

XXX

XXX

XXX

Other current financial assets

XXX

XXX

XXX

XXX

XXX

XXX

Prepayments

Cash and short-term deposits

XXX

XXX

XXX

XXX

XXX

XXX

Assets classified as held for distribution

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

XXX

Total assets

104 | Guide to First-time Adoption of Ind AS

Group reconciliation of profit or loss for the year ended 31 March 2016
(INR million)
Footnotes Indian GAAP

Adjustments

Ind AS

Continuing operations
Sale of goods

XXX

XXX

XXX

Rendering of services

XXX

XXX

XXX

Rental income

XXX

XXX

XXX

Revenue from operations

XXX

XXX

XXX

Other income

XXX

XXX

XXX

Finance Income

XXX

XXX

XXX

Total Revenue

XXX

XXX

XXX

XXX

XXX

XXX

Purchase of traded goods

XXX

XXX

XXX

(Increase)/ decrease in inventories of finished goods,


work-in-progress and traded goods

XXX

XXX

XXX

Cost of raw material and components consumed

c, d

c, d

Employee benefits expense

c, d, i,

XXX

XXX

XXX

Depreciation and amortization expense

c, d, m

XXX

XXX

XXX

XXX

XXX

XXX

Impairment of non-current assets


Finance costs

c, d

XXX

XXX

XXX

Other expenses

c, d

XXX

XXX

XXX

Share of (profit)/ loss from investment in associate and a


joint venture

c, d

XXX

XXX

XXX

Profit before tax from continuing operations

XXX

XXX

XXX

(1) Current tax

XXX

XXX

XXX

(2) Adjustment of tax relating to earlier periods

XXX

XXX

XXX

XXX

XXX

XXX

Income tax expense

XXX

XXX

XXX

Profit for the year from continuing operations

XXX

XXX

XXX

(3) Deferred tax

Guide to First-time Adoption of Ind AS | 105

(INR million)
Footnotes Indian GAAP

Adjustments

XXX

XXX

XXX

Profit/(loss) after tax for the year from discontinued


operations

XXX

XXX

XXX

Tax expenses

XXX

XXX

XXX

Profit for the year from continuing operations

Ind AS

Discontinued Operations

Profit/(loss) for the year discontinuing operation

XXX

XXX

XXX

Profit /(loss) for the year

XXX

XXX

XXX

Attributable to:

XXX

Equity shareholder of parents


Non-controlling interest

XXX
XXX

Other comprehensive income


(Other comprehensive income to be reclassified to profit
or loss in subsequent period)
Exchange differences on translation of foreign operations

XXX
XXX

Net movement on cash flow hedges


Income tax effect

XXX

Net (loss)/gain on available-for-sale financial assets

XXX

Income tax effect

XXX

Actuarial gains and losses on defined benefit plans

XXX

Income tax effect

XXX

Other comprehensive income for the year, net of tax

XXX
XXX

Total comprehensive income for the year,


net of tax

106 | Guide to First-time Adoption of Ind AS

XXX

Footnotes to the reconciliation of equity as at 1 April 2015 and 31 March 2016


and profit or loss for the year ended 31 March 2016
a) Business combinations
The Group has acquired only one business on slump sale basis
during the period beginning 1 April 2014 and ending before
the transition date. The Group has applied Ind AS 103 to
business combinations occurring on or after 1 April 2014. The
application of Ind AS 103 resulted in the following changes
in carrying amounts of assets and liabilities at the acquisition
date:
Particulars

Indian
GAAP

Adjustment

Ind AS

Land

Building and Installation

Machine

Intangible asset

Inventories

(X)

Receivable

Other Current asset

(X)

Total Assets

XXX

XX

XX

Current liabilities

(XX)

(X)

(XX)

Deferred income taxes

(XX)

(X)

(XX)

Contingent liabilities

(X)

(X)

Total Liabilities

(XX)

(X)

(XX)

Net Assets

XX

XX

XX

Enterprise value

XX

XX

Goodwill

XX

XX

as deferred taxes are not recognized for temporary difference


arising from goodwill for which amortization is not deductible
for tax purpose.Unconsolidated subsidiaries
The group holds 45% equity interest in ABC Limited. Under
Indian GAAP, the Group has treated ABC Limited as its
associate and thereby applied equity method of accounting.
Under Ind AS, the group has treated ABC Limited as its
subsidiary based on De facto control and thereby applied
line-by-line consolidation. FTA had acquired investment in
ABC for INR xxxx million, which is the cost of the subsidiary
in FTAs separate financial statements. The carrying amount
of ABCs net asset on an Ind AS basis will be INR xxxx million.
To consolidate ABC at the date of transition, FTA records its
investment in its opening Ind AS consolidated balance sheet as
follows:
Debit
Various assets and liabilities

xxx

Goodwill

xxx

Credit

Non-Controlling interest

xx

Cost of Investment in ABC

xx

The group has tested goodwill for impairment in accordance


with Ind AS 36 at the date of transition to Ind AS, regardless of
whether there is any indication of impairment. No impairment
was deemed necessary at 1 April 2015.

b) Goodwill amortization
Under Indian GAAP, goodwill was amortized on a straight line
basis over the economic life of the asset, subject to maximum
of 10 years. Under Ind AS, goodwill is not amortized but is
measured at cost less impairment losses. For the business
combinations restated according to Ind AS 103, the goodwill
amortization has been reversed retrospectively. For all other
part business combinations, goodwill under Indian GAAP as at
the transition date as adjusted for specific adjustments required
by Ind AS 101 has been used as carrying amount. After the
transition date, no goodwill is amortized; rather, it is tested for
impairment annually. The effect of the change is an increase
in equity as on 1 April 2015 of INR xxx millions, on 31 March
2016 of INR xxx millions and increase in profit before tax for
31 March 2016 by INR xx millions. The change has no tax effect
Guide to First-time Adoption of Ind AS | 107

c) Unconsolidated subsidiaries

Assets

The group holds 45% equity interest in ABC Limited. Under


Indian GAAP, the Group has treated ABC Limited as its
associate and thereby applied equity method of accounting.
Under Ind AS, the group has treated ABC Limited as its
subsidiary based on Defacto control and thereby applied line
by line consolidation. FTA had acquired investment in ABC
for INR xxxx million, which is the cost of the subsidiary in
FTAs separate financial statements. The carrying amount of
ABCs net asset on an Ind AS basis will be INR xxxx million.
To consolidate ABC at the date of transition, FTA records its
investment in its opening Ind AS consolidated balance sheet as
follows:

Goodwill

Debit
Various assets and liabilities

xxx

Goodwill

xxx

Credit

Current Assets
Inventory

XX

Trade receivable

XX

Cash & bank Balance

XX

Property, plant & equipment

XX

Loans & advances

XX

Total Assets

XXXX

Liabilities
Current Liabilities
Trade payable

XX

Provision

XX

Non-Current Liabilities

Non-Controlling interest

xx

Cost of Investment in ABC

xx

The group has tested goodwill for impairment in accordance


with Ind AS 36 at the date of transition to Ind AS, regardless of
whether there is any indication of impairment. No impairment
was deemed necessary at 1 April 2015.
d) Joint venture
The group holds 45% equity interest in ABC Limited. Under
Indian GAAP, the Group has treated ABC Limited as its
associate and thereby applied equity method of accounting.
Under Ind AS, the group has treated ABC Limited as its
subsidiary based on Defacto control and thereby applied line
by line consolidation. FTA had acquired investment in ABC
for INR xxxx million, which is the cost of the subsidiary in
FTAs separate financial statements. The carrying amount of
ABCs net asset on an Ind AS basis will be INR xxxx million.
To consolidate ABC at the date of transition, FTA records its
investment in its opening Ind AS consolidated balance sheet
as follows:
Given below is the breakdown of the assets and liabilities that
have been aggregated into the single line investment balance at
the date of transition to Ind AS:

108 | Guide to First-time Adoption of Ind AS

Amount

Long term loan & borrowing

XX

Deferred tax liabilities

XX

Net assets

XX

Group carrying amount of investment

XX

e) FVTOCI financial assets


The group holds 50% interest in S Limited and exercises joint
control over the entity. Under Indian GAAP, the group has
proportionately consolidated its interest in the S Limited. On
transition to Ind AS, the group has assessed and determined
that S Limited is its joint venture under Ind AS 111 Joint
Arrangements. Therefore, it needs to be accounted for using
the equity method. For the application of equity method, the
initial investment is measured as the aggregate of carrying
amount of assets and liabilities that the group had previously
proportionately consolidated. The carrying amount also
includes any goodwill arising on acquisition. The group
has tested its investment in joint venture for impairment in
accordance with Ind AS 36 at the date of transition to Ind AS.
No impairment was deemed necessary at 1 April 2015.
f)

Trade and other receivables

Under Indian GAAP, the Group accounted for long term


investments in non-quoted and quoted equity shares as
investment measured at cost less provision for other than
temporary diminution in the value of investments. Under Ind
AS, the Group has designated such investments as FVTOCI
investments. Ind AS requires FVTOCI investments to be
measured at fair value. At the date of transition to Ind AS,
difference between the instruments fair value and Indian GAAP
carrying amount has been recognized as a separate component
of equity, in the FVTOCI equity reserve, net of related deferred
taxes.

Under Indian GAAP, the Group accounted for long term


investments in debt securities as investment measured at cost
less provision for other than temporary diminution in the value
of investments. Under Ind AS, the Group has designated certain
investments as FVTOCI debt investments. Ind AS requires
FVTOCI to be measured at fair value. At the date of transition to
Ind AS, difference between instruments fair value and Indian
GAAP carrying amount has been recognized as a separate
component of equity, in the FVTOCI debt reserve, net of related
deferred taxes.
g) Other financial assets and liabilities
The fair value of forward foreign exchange contracts is
recognized under Ind AS, and was not recognized under Indian
GAAP. The contracts, which were designated as hedging
instruments under Indian GAAP, have been designated as at the
date of transition to Ind AS as hedging instrument in cash flow
hedges of either expected future sales for which the group has
firm commitments or expected purchases from suppliers that
are highly probable. The corresponding adjustment has been
recognized as a separate component of equity, in the cash flow
hedge reserve.
h) Trade and other payables
Under Indian GAAP, proposed dividends are recognized as
a liability in the period to which they relate, irrespective of
when they are declared. Under Ind AS, a proposed dividend
is recognized as a liability in the period in which it is declared
by the company (usually when approved by shareholders in
a general meeting) or paid. In the case of Group, declaration
of dividend occurs after period end. Therefore, the liability
recorded for this dividend has been derecognized against
retained earnings.
i)

Defined benefit obligation

Both under Indian GAAP and Ind AS, the Group recognized
costs related to its post-employment defined benefit plan on an
actuarial basis. Under Indian GAAP, the entire cost, including
actuarial gains and losses, are charged to profit or loss.
Under Ind AS, re-measurements (comprising actuarial gains
and losses, the effect of the asset ceiling, excluding amounts
included in net interest on the net defined benefit liability and
the return on plan assets excluding amounts included in net
interest on the net defined benefit liability) are recognized
immediately in the balance sheet with a corresponding debit or
credit to retained earnings through OCI.

j)

Share-based payments

Under Indian GAAP, the Group recognized only the intrinsic


value for the long-term incentive plan as an expense. Ind AS
requires the fair value of the share options to be determined
using an appropriate pricing model recognized over the vesting
period. An additional expense of INR xxxx million has been
recognised in profit or loss for the year ended 31 March 2016.
Share options totalling INRxxxx million, which were granted
before and still vesting at 1 April 2015, have been recognized
as a separate component of equity against retained earnings at
1 April 2016.
k) Foreign currency translation
Under Indian GAAP, the Group recognized only the intrinsic
value for the long-term incentive plan as an expense. Ind AS
requires the fair value of the share options to be determined
using an appropriate pricing model recognized over the vesting
period. An additional expense of INR xxxx millions has been
recognized in profit or loss for the year ended 31 March 2016.
l)

Property, plant and equipment

The group has elected to measure certain items of property,


plant and equipment at fair value at the date of transition to
Ind AS. Hence, at the date of transition to Ind AS, an increase
of INR xxxx million (31 March 2016: INR xxxx millions) was
recognized in property, plant and equipment. This amount has
been recognized against retained earnings.
m) Depreciation of property, plant and equipment
Ind AS 16 requires significant component parts of an item of
property, plant and equipment to be depreciated separately.
The cost of major inspections is capitalized and depreciated
separately over the period to the next major inspection. At
the date of transition to Ind AS, an increase of INR xxxx million
(31 March 2016: INRxxxx million) was recognized in item of
property, plant and equipment (note covered in (l) above) net
of accumulated depreciation due to separate depreciation of
significant components of property, plant and equipment. This
amount has been recognized against retained earnings.
n) Interest bearing loans and borrowings
Ind AS 16 requires significant component parts (including
major inspections) of an item of property, plant and equipment
to be depreciated separately. The cost of major inspections
is capitalized and depreciated separately over the period to
the next major inspection. At the date of transition to Ind

Guide to First-time Adoption of Ind AS | 109

AS, an increase of INR xxxx millions (31 March 2016: INR


xxxx millions) was recognized in item of property, plant and
equipment (note covered in (l) above) net of accumulated
depreciation due to separate depreciation of significant
components of property, plant and equipment (particularly
major inspection). This amount has been recognized against
retained earnings.
o) Provisions
Under Indian GAAP, the Group has accounted for provisions,
including long-term provision, at the undiscounted amount.
In contrast, Ind AS 37 requires that where the effect of time
value of money is material, the amount of provision should be
the present value of the expenditures expected to be required
to settle the obligation. The discount rate(s) should not reflect
risks for which future cash flow estimates have been adjusted.
Ind AS 37 also provides that where discounting is used, the
carrying amount of a provision increases in each period to
reflect the passage of time. This increase is recognized as
borrowing cost.
p) Deferred revenue/ contract liability
Within its electronics segment, the Group operates a loyalty
points program, which allows customers to accumulate points
when they purchase products in the Groups retail stores.
The points can be redeemed for free products, subject to a
minimum number of points being obtained. Under Indian GAAP,
the Group creates a provision toward its liability under the
reward program.

r) Government grant
The Group has received an interest-free loan under the
development scheme from the government for INR xxx million.
Under the Indian GAAP, the Group has accounted for the loan
as liability and the carrying amount was INR xxx million at the
date of transition to Ind AS. The Group will apply Ind AS 109
to the measurement of such loan after 1 April 2015 (date of
Transition to Ind AS). Since the loan does not carry any interest
and is repayable at the amount recognized in the opening
balance sheet, no interest needs to be recognized on the loan.
s) Deferred tax
Indian GAAP requires deferred tax accounting using the income
statement approach, which focuses on differences between
taxable profits and accounting profits for the period. Ind AS 12
requires entities to account for deferred taxes using the balance
sheet approach, which focuses on temporary differences
between the carrying amount of an asset or liability in the
balance sheet and its tax base. The application of Ind AS 12
approach has resulted in recognition of deferred tax on new
temporary differences, which was not required under Indian
GAAP.
In addition, the various transitional adjustments lead to
different temporary differences. According to the accounting
policies, the Group has to account for such differences.
Deferred tax adjustments are recognized in correlation to the
underlying transaction either in retained earnings or a separate
component of equity.

Under Ind AS, consideration received is allocated between the


electronic products sold and the points issued on a relative
stand-alone selling price basis. If the stand-alone selling price
for a customers option to acquire additional goods or services
is not directly observable, the group estimates it. Fair value
of the points is determined by applying a statistical analysis.
The fair value allocated to the points issued is deferred and
recognized as revenue when the points are redeemed.

t) Other comprehensive income

q) Convertible preference shares

The transition from Indian GAAP to Ind AS has not had a


material impact on the statement of cash flows.

The group has issued convertible redeemable preference


shares. The preference shares carry fixed cumulative dividend,
which is non-discretionary. Under Indian GAAP, the preference
shares were classified as equity and dividend payable thereon
was treated as distribution of profit.
Under Ind AS, convertible preference shares are separated
into liability and equity components based on the terms of the
contract. Interest on liability component is recognised using the
effective interest method.

110 | Guide to First-time Adoption of Ind AS

Under Indian GAAP, the Group has not presented other


comprehensive income (OCI) separately. Hence, it has
reconciled Indian GAAP profit or loss to profit or loss according
to Ind AS. Furthermore, Ind AS profit or loss is reconciled to
total comprehensive income as per Ind AS.
u) Statement of cash flows

v) Errors under Indian GAAP


If errors made under Indian GAAP are discovered during
the transition to Ind AS, any adjustments to equity or
comprehensive income for these amounts must be identified
as error corrections in the reconciliation rather than as Ind AS
transition adjustments. As part of transition process, the Group
has not discovered any errors under the Indian GAAP.

This publication was developed with


inputs and contributions from
Dolphy DSouza
Vishal Bansal
Santosh Maller
Ravikant Kamath
Asgar Khan

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Guide to First-time Adoption of Ind AS | 111

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EY refers to the global organization, and/or one or more of the


independent member firms of Ernst & Young Global Limited

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